Journal of Supply Chain Management Copyright © May 2001, by the Institute for Supply Management, Inc.

Author(s):

Andrew Cox
Andrew Cox is Chairman of Robertson Cox Ltd, in the UK and USA. He can be contacted at ac@robcox.com.

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In this final article, the issue that most concerns buyers — how to achieve a better deal — is discussed. This necessarily implies finding ways to transform the current power relationship between buyers and suppliers such that buyers can achieve more effective leverage of value. The focus here is on how buyers are best able to maximize their ability to appropriate value rather than on how suppliers can achieve this. This does not mean that buyers must always seek to take advantage of suppliers. On the contrary, there will always be circumstances when the best deal a buyer can achieve will involve working closely with a supplier and sharing the benefits of such collaboration.

The point is that collaboration is not the only choice available for managing suppliers, nor may it be the most appropriate choice for the buyer under all circumstances. From a buyer’s perspective, competence resides in deciding how much of the value created from an exchange relationship can and should be shared with any supplier and choosing whether to work collaboratively or at arm’s length to achieve the maximum return.

The discussion is in three parts. In the first section, the problem of the concept of best practice is addressed. The second section discusses proactive supplier selection. The final section discusses proactive supply development.

THE TYRANNY OF BEST PRACTICE

In recent years, there has been a tendency to believe that integrated supply chain management (ISCM) is best practice. The articles in this volume have argued that this way of thinking may be incomplete. Those who seek to adopt the ISCM approach have been guilty of a failure to properly understand the power circumstances within which ISCM practices were originally undertaken, and of a tendency to adopt a "barefoot empiricist" approach to explanation (Cox 1997).

Practitioners are hard-pressed these days because of the tyranny of financially driven quarterly returns. Managers must constantly find ways of reducing costs and improving revenue generation and are constantly searching for innovation. It is not surprising that there has been a growth in benchmarking as the perceived best way to achieve innovation on the cheap. The busy manager — unable to spend the time to think through from first principles which practices are likely to be the most effective — has tended to look for shortcuts.

Consultancy companies have grown fat on the fact that practitioners do not have the time to determine the ideal route to success for themselves. Because some organizations do find innovative practices that work, consultancy companies are able to offer practitioners an apparently easy and painless route to innovation. It is a simple enough idea. All that practitioners need to do is to copy the practices of others, as revealed to them by consultancy companies. After all, these are empirically proven ways of working (best practices) that have delivered results for others.

Unfortunately, this approach rarely delivers the expected success for those who copy. The major reason for this is that benchmarking companies often slavishly replicate what others have done, without any real understanding of the environmental circumstances surrounding the successful implementation. This problem is compounded if those who study what others have done fail to understand the fundamental causes of success and counsel others to adopt inappropriate practices.

Any corporate "best practice" is clearly contextually and relationally dependent. This implies that a successful way of doing something can only be copied if the objective situation of power that existed originally, and the relationship management approach utilized at that time, can be effectively replicated. In other words, it is the ability to replicate the relational and contextual circumstances that is the key to successful benchmarking, not the knowledge of the specific relational practices that were adopted.

All too often, practitioners are advised to undertake relational practices — like ISCM — when there is little opportunity for these practices to be implemented successfully. This is not to argue that an ISCM approach is always inappropriate. On the contrary, the Japanese car manufacturers and their Western emulators have clearly demonstrated that there is considerable value to be achieved by adopting longer-term and more collaborative working relationships with their supply chains.

The key is to recognize that while this approach can be made to work successfully in some circumstances, it cannot be made to work successfully in all. There is no doubt that the recent critique of the ISCM approach by those who call for a differentiation between lean and innovative (agile) supply chain management strategies has been occasioned by the view that not every buyer-supplier relationship or supply chain should be managed in the same way (Fisher 1997; Wilding 1999).

To understand which relationship management approaches work best, the starting point should not be to recommend the adoption of an approach that has worked in one circumstance to see if it will work in others. This is a recipe for disaster. A more scientifically rigorous and useful way of thinking must be to understand that there are different ways of leveraging value appropriation from buyer and supplier exchange relationships and that there are also a range of different power circumstances in which buyers and suppliers may find themselves. Only by properly understanding the objective contextual (power) circumstances that exist between buyers and suppliers, and the range of relationship management choices available to them, will practitioners be able to understand what are the most appropriate ways of managing business situations.

Practitioners must first recognize that the ISCM approach may, or may not, be an appropriate way for them to manage their supply relationships. To know whether or not it is appropriate requires that practitioners first recognize that ISCM is essentially a proactive way of working with suppliers that focuses on more than just selection. In effect, the ISCM approach is focused on proactive supply development.

Supply development means proactively working with suppliers to ensure that there is a fundamental transformation in the supply offering that is made to the buyer from the supply chain power regime. This transformation occurs at the first tier and throughout the extended network of dyadic exchange relationships for a particular product and/or service. This approach can only be made to work within a permissive environment. Such a permissive environment must always involve an extended network of supply chain exchange relationships primarily comprised either of buyer dominance or of buyer-supplier interdependence or a combination of the two.

Proactive supplier development is very different from proactive supplier selection. When the power regime circumstances facing the buyer are not conducive to a proactive supply development approach, competence is normally achieved by effective leverage at only the first tier of supply. This is not an inferior approach to proactive supply development. On the contrary, it is our view that there will be few circumstances in which the power regimes (or subregimes) that the buyer faces are conducive to proactive supply development. In most circumstances, therefore, improved value can only be achieved — given the resources available to the buyer — through action at the first tier, using relatively short-term relationship management techniques.

To achieve success with this approach, the buyer normally uses techniques based on the consolidation of internal spend and the threat of external switching. What this means is that the buyer ensures, first, that the internal spend for all similar products and services is amalgamated so that all economies of scale can be leveraged from any potential suppliers. Second, the buyer ensures that the market for the supply of any product or service remains highly contested and uses this power to force suppliers to innovate on their own in order to win the business from the buyer. In these circumstances, it is the threat of switching from one supplier to another that is the key to effective leverage.

The development of effective competence in procurement and supply management requires that practitioners possess a knowledge of the tools and techniques that assist with both proactive supplier selection and proactive supply development. But, more than this, competence requires that practitioners first understand the power circumstances that they are in so that they can decide whether to pursue supplier selection or supply development. How buyers develop competence in these two broad areas is discussed in the next two sections.

PROACTIVE SUPPLIER SELECTION

Buyers often do not fully understand the power circumstance that they are in and pursue inappropriate relationship management strategies, given the objective power circumstances that exist. More worrying, many practitioners do not have robust methodologies that allow them systematically to understand the power circumstances that exist. It is for this reason that many practitioners are pursuing supply development (ISCM) approaches when they should be focusing on proactive supplier selection, and vice versa.

It is clear that proactive supply development can only be achieved in a few rare circumstances when the buyer has the capability (power) to work closely with the extended network of suppliers within the supply chain to achieve innovation in the product or service created by that chain. These circumstances will be discussed in the final section of this article. In all other circumstances, where the buyer does not possess the power attributes to be able to create supply chain innovation working with the suppliers in the chain, the buyer will have to focus on proactive supplier selection. In so doing, the buyer’s role will necessarily be confined to encouraging suppliers at the first tier of the supply chain to innovate on their own.

It is normal in undertaking proactive supplier selection that buyers create strategic source plans for all major categories of spend. Strategic source planning normally entails the effective alignment of demand and supply, as well as the development of knowledge and understanding of the power circumstances that exist between the buyer and the supplier. From this starting point, the buyer is then in a position to begin to devise sourcing strategies that improve the leverage position of the buyer in the future.

As outlined earlier in the discussion of The Power Matrix, there are basically four power circumstances that buyers may find themselves in when they engage in exchange relationships with suppliers. If an improvement in value is to be achieved, it is imperative that buyers change the current power circumstance they are in to one that is more conducive for every area of spend for which they are responsible. This implies that it is essential that practitioners not only select the most appropriate suppliers to work with but also find ways of moving their supply relationships from the current power circumstance to one that improves value appropriation for the buyer in the future.

How can this be achieved? The objective power circumstances in which buyers find themselves can be defined either as buyer dominance, interdependence, independence, or supplier dominance. The key to competence in supplier selection must, therefore, be the ability to find leverage routes that move suppliers from their existing power situations to circumstances that provide the buyer with more effective leverage over quality and cost. Figure 1 demonstrates the key routes that buyers must always focus on in order to achieve more effective leverage through proactive supplier selection.

The key leverage opportunities that would move existing buyer-supplier relationships from their current positions to more favorable locations from the buyer’s perspective can be outlined theoretically:

Route 1: Supplier Dominance to Buyer Dominance

• Increase the buyer’s share of the market
• Increase the number of suppliers in the market
• Increase selected suppliers’ dependency on the buyer
• Create commoditization and standardization of supply
• Ensure cost and quality transparency

Route 2: Supplier Dominance to Interdependence

• Increase buyer’s share of the market
• Increase number of suppliers
• Work closely with preferred supplier(s) for technology/innovation sharing
• Lock-in high-quality suppliers
• Create jointly owned product/service differentiation

Route 3: Supplier Dominance to Independence

• Increase number of suppliers
• Encourage substitutes
• Create commoditization and standardization
• Innovate to reduce buyer search costs
• Lower barriers to entry for new entrants

Route 4: Interdependence to Buyer Dominance

• Increase buyer’s share of the market
• Increase number of suppliers
• Increase preferred supplier dependency on buyer
• Increase commoditization and standardization of supply
• Reduce supplier control of intellectual property rights

Route 5: Independence to Interdependence

• Increase buyer’s share of the market
• Select preferred suppliers for close working relationship
• Increase supplier dependency on buyer business
• Lock-in suppliers with distinctive capabilities vis-à-vis their competitors
• Create jointly owned product/service differentiation

Route 6: Independence to Buyer Dominance

• Increase buyer’s share of the market
• Select suppliers with relatively high dependency on buyer
• Reduce buyer search costs
• Seek maximum degree of commoditization and standardization
• Increase attractiveness of buyer account to supplier

As Figure 2 indicates, however, buyers do not have a free hand in seeking to move their suppliers proactively around The Power Matrix. The buyer must always be aware that suppliers — if they are seeking to maximize their own shareholder’s value — will also be pursuing counterveiling strategies of their own. These strategies will focus on suppliers moving to power circumstances from which they are able to increase value appropriation from their relationships with buyers.

These caveat emptor (buyer beware) routes can also be outlined schematically. As can be seen from the supplier’s perspective, the preferred and ideal power circumstances that maximize its ability to appropriate value are the direct opposite of those that favor the buyer. Obviously, it is key to competence that buyers constantly seek to block attempts by suppliers to move them into the supplier dominance box, and to ensure that, whenever possible, they operate in power circumstances that are more conducive for the buyer.

PROACTIVE SUPPLIER DEVELOPMENT

The discussion so far has focused on how competence can be improved in the proactive selection of suppliers. That is, in circumstances when the buyer does not necessarily wish to transform the current supply offering directly but merely to obtain indirectly a better quality and/or price by selecting more effectively from among existing suppliers and supply offerings. It is clear, however, that sometimes there will be a need for buyers to work closely with some of their suppliers in order to develop their own, and their suppliers’, competence to provide a new supply offering. In so doing, the buyer is clearly undertaking to engage directly (not indirectly) to proactively change the relationship between quality and cost for the product or service under consideration.

Clearly, this type of approach is very different from the approach outlined under proactive supplier selection. With proactive supply development, the buyer is directly attempting to encourage innovation by working with suppliers, rather than relying on indirect market leverage to encourage selected suppliers to achieve breakthroughs in the relationship between cost and quality on their own. Whether or not this can be achieved effectively is not, however, a matter of chance.

Ideally, buyers seek to operate in the buyer dominance box, while suppliers seek the comfort of the supplier dominance box. Since buyers and suppliers ideally pursue contradictory goals — they both seek to maximize their own shareholder value as well as find it necessary to involve in mutually interdependent exchange relationships — there must be an objective tension in most business relationships. It follows that only certain sets of circumstances can be conducive for the development of proactive supply development activities.

It seems logical to argue, therefore, that some supply chain power regimes (and their subregimes) lend themselves to proactive supply development, while others do not. As Figure 3 reveals, there are four ideal types of extended dyadic exchange in supply chains — each one of which can be conceived as a subregime of a more complex power regime for a particular product or service, as depicted in Figure 4. As Figure 3 indicates, it is most likely that proactive supply development will be possible within supply chain structures (and power regimes) based on buyer dominance or interdependence, rather than those characterized by independence or supplier dominance. Similarly, it is only in Power Regime A, in Figure 4, that proactive supply development is likely. Power Regime B is highly unlikely to be conducive to such ISCM approaches.

The reason for the undoubted success of ISCM approaches in some supply chains and markets is, therefore, simple enough to explain (Womack and Jones 1996). In some supply chain circumstances, the power regime (or a significant number of the constituent subregimes) is amenable to proactive supply development. This is because the power regime is structured around extended networks of buyer dominance or buyer-supplier interdependence. Supply chains with these types of power regime include (Cox 1997; Cox and Townsend 1998):

• Food retailing
• Aerospace
• Automotive
• IT hardware
• Process construction projects
• Chemicals processing
• Contract manufacturing

In other supply chains, the power regimes (or a significant proportion of the constituent power subregimes) tend to favor buyer-supplier independence or supplier dominance. Supply chains with these types of power regime include:

• IT systems integration
• Strategic consulting services
• Retail banking services
• Sugar processing
• Internet routers
• Aftermarkets for most branded products and services
• Ad-hoc construction projects

In supply chains demonstrating these power circumstances, it is unlikely that proactive supply development activities can be successfully implemented, whatever the best intentions of buyers (Cox et al. 2001, forthcoming).

This explains why it is that there is considerable evidence of failure in proactive supply development (Cox 2000; Handfield et al. 2000). Yet, at the same time, it is clear that when the buyer is directly involved in leading the supply development process, real innovation can, and does, occur (Krause et al. 2000). Why should this be so? The answer is self-evident.

Most failures in proactive supply development appear to occur due to a failure by practitioners to understand that there must be an appropriate power circumstance in place for innovation to be made to work. Only when the buyer is in a position of dominance over the supplier and capable of leading innovation, or there is an interdependence of power in which a mutual coincidence of interest encourages joint learning, can this approach be made to work successfully. When the supplier dominates the power relationship, or there is buyer-supplier independence, it is unlikely that suppliers will have any real incentive to undertake specific innovations for any one customer.

CONCLUSIONS: ON POWER, APPROPRIATENESS, AND PROCUREMENT COMPETENCE

The ghost in the machine of proactive supply development is not the enthusiasm of the participants but the possession of sufficient power resources by the buyer relative to its extended network of suppliers. Thus, ISCM approaches work best in supply chain circumstances of extended buyer dominance or extended buyer and supplier interdependence.

Close collaborative, long-term relationships focused on joint development of supply are only really appropriate for buyers to pursue when they are in either of these two circumstances or when they can engineer the creation of the appropriate supply chain power regimes. Most of the time, buyers are not in these power circumstances and lack the internal resources to do anything other than contract with first-tier suppliers. As a result, the appropriate thing to do is to focus on proactive supplier selection.

Within this approach, however, buyers should not focus only on short-term, arm’s-length relationships. They can also use the same long-term collaborative approaches that are normally used for proactive supply development. Collaboration can be used indirectly to leverage first-tier suppliers from one power circumstance to another, much as it can be useful in encouraging direct innovation throughout a supply chain.

Even when this more indirect, first-tier approach is used, buyers must still be aware of their power circumstances. It is through this awareness of the objective circumstances of power, as well as the ability to find ways to move to more congenial power circumstances, that competence in procurement and supply management is achieved. It will always be essential for practitioners to recognize that "best practice" involves being able to effectively manage both proactive supplier selection as well as proactive supply development.

Ultimately, competence in procurement and supply management is based on the recognition that the best circumstance for the buyer is not the pursuit of any one relationship management approach. Rather, it is based on the recognition that the ideal circumstance for any buyer is to be located in the buyer dominance box, as well as on the ability to devise strategies to move all supply relationships (or as many as possible) toward this ideal. This is "managing with power."

REFERENCES

• Cox, A. Achieving Superior Supplier Performance, CBSP Working Paper (1/3), Birmingham Business School, University of Birmingham, United Kingdom, March 2000.
• Cox, A. Business Success, Earlsgate Press, Boston, United Kingdom, 1997.
• Cox, A., et al. Supply Chains, Markets and Power, Routledge, London, England, 2001 forthcoming.
• Cox, A. and M. Townsend. Strategic Procurement in Construction, Thomas Telford, London, England, 1998.
• Fisher, M.L. "What is the Right Supply Chain for Your Product?" Harvard Business Review, March-April 1997, pp. 105-116.
• Handfield, R.B., et al. "Avoid the Pitfalls in Supplier Development," Sloan Management Review, Winter 2000, pp. 37-49.
• Krause, D.R., et al. "A Structural Analysis of the Effectiveness of Buying Firms’ Strategies to Improve Supplier Performance," Decision Sciences, (31:1), Winter 2000, pp. 33-55.
• Wilding, R. "The Role of Time Compression and Emotional Intelligence in Agile Supply Chains," Supply Chain Excellence, (6), September 1999.
• Womack, J.P. and D.T. Jones. Lean Thinking, Simon & Schuster, New York, NY, 1996.

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