cox, ireland et al - supply chain management (2003)

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Supply Chain Management


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A guide to best practice

ANDREW COX, PAUL IRELAND,

CHRIS LONSDALE, JOE SANDERSON

AND GLYN WATSON

Prentice HallFINANCIAL TIMES

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First published in Great Britain in 2003

Andrew Cox, Paul Ireland, Chris Lonsdale,

Joe Sanderson and Glyn Watson 2003

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Joe Sanderson and Glyn Watson to be identified as authors

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v

About the authors

Andrew Cox is Professor and Director of the Centre for Business Strategy and

Procurement at Birmingham Business School, University of Birmingham in the UK. He

is also Chairman and CEO of Robertson Cox Ltd a UK and US based consultancy.

Andrew can be contacted at: [email protected]

Paul Ireland is a research fellow in the Centre for Business Strategy and

Procurement at Birmingham Business School, University of Birmingham in the UK.

Paul can be contacted at: [email protected]

Chris Lonsdale is a lecturer in Supply Chain Management in the Department of

Commerce and the Centre for Business Strategy and Procurement at Birmingham

Business School, University of Birmingham in the UK.

Chris can be contacted at: [email protected]

Joe Sanderson is a lecturer in Supply Chain Management in the Department of

Commerce and the Centre for Business Strategy Land Procurement at Birmingham


Joe can be contacted at: [email protected]

Glyn Watson is a lecturer in Supply Chain Management in the Department of

Commerce and the Centre for Business Strategy and Procurement at Birmingham


Glyn can be contacted at: [email protected]


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vii

Contents

List of figures ix

List of tables x

Preface xi

Supply chain management and best practice

sourcing 1

Introduction 3

The four basic sourcing options 4

Which of the options is best practice for the buyer? 8

The key enablers of SCM implementation 9

Conclusions 12

References 13

Is supply chain management the best strategic

sourcing option? 15Introduction 17

Selecting the right sourcing strategy 18

Internal investments and the makebuy decision 19

External investments and the four generic sourcing strategies 24

Selecting strategic sourcing options 27

Conclusions 34

References 35

Is supply chain management feasible operationally? 37

Introduction 39

Internal success factors 40

External success factors 51

Conclusions 62

References 63

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viii

Contents

Implementing supply chain management initiatives 65

Introduction 67

The three competitive market and SCM strategy options 67A framework for developing competitive market and SCM

strategies 71

Creating a physically efficient (lean) supply chain 75

Creating an innovative and market-responsive (agile)

supply chain 89

Market differentiation and cost leadership with an

innovative and process efficiency supply chain strategy 94

Conclusions: the conundrum of knowledge and understanding 97

References 99

Software and Internet tools for effective supply

chain management 101

Introduction 103

The theoretical benefit of software and Internet tools for

SCM initiative 103

The major e-sourcing software applications 107

The major Internet sourcing applications 110

A framework for analyzing the utility of software and

Internet-based tools and SCM initiatives 116

Conclusions 119

References 120

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ix

Figures

1.1 The four sourcing options for buyers 5

1.2 The Power Matrix between buyers and suppliers 10

1.3 Internal opposition and support for SCM strategies 11

2.1 The 5-step model to proactive supply chain management 17

2.2 Calculating and allocating costs 27

2.3 Calculating post-contractual risk 31

2.4 Calculating the return 32

3.1 Customer portfolio framework: what type of customer is the buyer? 43

3.2 Knowing your enemies and your friends 50

3.3 The attributes of buyer and supplier power 54

3.4 The competence and congruence matrix 57

3.5 Hypothetical idealized power regimes in supply chains 59

3.6 The power regime for in-flight re-fuelling equipment 61

4.1 The three competitive market and supply chain strategy options 68

4.2 Functional and innovative demand profiles 72

4.3 Physically efficient and market-responsive supply chains 73

4.4 Matching supply chains with products/services 75

4.5 An example of big picture mapping 79

4.6 An example of process activity mapping 81

4.7 Strategies for cycle time reduction 92

4.8 Understanding the scope for successful implementation of market

and SCM strategies 98

5.1 Internal and external enterprise process flows 108

5.2 The e-enabled internal and external enterprise process flows 111

5.3 The operational use value of software and Internet-based applications 116


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x

3.1 Actors involved in the organizational sourcing process 41

3.2 Key tools and techniques for SCM 42

3.3 Potential demand management problems 45

3.4 Rating the power of different functions involved in the sourcing process 49

Tables


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xi

Preface

The work that has supported the production of this short practitioner volume has

been underway for a number of years. It began in the mid-1990s with the publication

of a book that challenged much of the received orthodoxy in procurement and supply

management in particular and business thinking in general.

Since the publication of that book Business Success (1997) the work of the

Centre for Business Strategy and Procurement in Birmingham Business School at the

University of Birmingham has been devoted to testing empirically the theoretical

arguments first outlined in that volume, and then latterly in two companion

volumes Power Regimes (2000) and Supply Chains, Markets and Power (2002).The latter two volumes were based on work that was generously supported by a

research grant from the Engineering and Physical Sciences Research Council (EPSRC)

(Project No: GR/L86395). This latest volume has been based on work into

Competitive Advantage through Supply Chain Management that has also been

generously supported by the EPSRC (Project No: GR/N34161/01). We would like to

express our gratitude to the EPSRC and also to the collaborating public and private

sector organizations involved in these two research projects. This is because many of

the findings outlined here could not have been made without the generous support

both financial and time that has been provided to the research team.

There will be a companion volume to this particular offering in the near future

exploring the link between types of buyer and supplier power structures and

alternative forms of relationship management. When this is completed we will

have finished the current empirical testing of our original hypotheses about the

ways practitioners can manage business-to-business relationships whether they

are buyers or suppliers.

We hope that, if nothing else, this body of work will challenge our readers to

think logically about how to manage their business relationships and, hopefully,

provide them with some clues as to how they might maximize whatever valued

outcomes they desire from their business interactions with others.


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vii

Contents

List of figures ix

List of tables x

Preface xi

Supply chain management and best practice

sourcing 1

Introduction 3



The key enablers of SCM implementation 9

Conclusions 12

References 13

Is supply chain management the best strategic

sourcing option? 15Introduction 17



External investments and the four generic sourcing strategies 24


Conclusions 34

References 35

Is supply chain management feasible operationally? 37

Introduction 39

Internal success factors 40

External success factors 51

Conclusions 62

References 63

1

2

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viii

Contents

Implementing supply chain management initiatives 65

Introduction 67

The three competitive market and SCM strategy options 67A framework for developing competitive market and SCM

strategies 71

Creating a physically efficient (lean) supply chain 75

Creating an innovative and market-responsive (agile)

supply chain 89

Market differentiation and cost leadership with an

innovative and process efficiency supply chain strategy 94

Conclusions: the conundrum of knowledge and understanding 97

References 99

Software and Internet tools for effective supply

chain management 101

Introduction 103

The theoretical benefit of software and Internet tools for

SCM initiative 103

The major e-sourcing software applications 107

The major Internet sourcing applications 110

A framework for analyzing the utility of software and

Internet-based tools and SCM initiatives 116

Conclusions 119

References 120

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2

Is supply chainmanagement the beststrategic sourcing option?

Introduction 17



External investments and the four generic sourcing

strategies 24


Conclusions 34

References 35

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Is SCM the best strategic sourcing option?

INTRODUCTION

As we saw, the issue of whether to undertake SCM or to pursue alternative

approaches to external relationship management has become a significant topic formost companies. This is because, faced with increased international competition,

firms have come under intense pressure to cut costs in order to survive and sustain

double-digit returns on investment. In seeking to achieve this, firms have looked

for world-class practices wherever they can be found. One of the sources of

inspiration has been proactive Japanese lean manufacturing and supply chain

practice (Womack and Jones, 1996). This practice can be distilled into a simple

5-step model that companies should follow as shown in Figure 2.1.

Fig. 2.1 The 5-step model to proactive supply chain management

1. Concentrate on core competencies.

2. Outsource all non-core competencies to suppliers.

3. Consolidate all supply inputs into categories of spend.

4. Concentrate internal resources on a limited number of long-term collaborative

relationships with preferred suppliers.

5. Improve supplier and supply chain performance through proactive supply chain

development activities.

As we noted in the preceding chapter, however, any firm has a choice of four

generic supply strategies and not one. The strategic choice that a company has to

make, therefore, is whether or not SCM (as summarized in the 5-step model in

Figure 2.1) is the most strategically relevant approach, rather than supplier

selection, supply chain sourcingor supplier development.

Deciding on which of these approaches makes sense for any company depends

on two major variables. First, practitioners must understand the constraints to be

overcome when trying to implement any strategy. It makes little sense to develop

a plan of action that has almost no hope of garnering support from either internal

stakeholders or external suppliers. Consequently, a detailed account of the

operational constraints facing managers follows in the next chapter.

Second, prior to consideration of operational issues, it is necessary to understand

whether there is a strategic case for the adoption of a SCM approach. Whether this

approach should be developed depends largely on the strategic economic and

commercial case that can be made.

This is because sourcing decisions like business management decisions more

generally require companies to pick the option that offers the greatest possible

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pay-off (and/or imposes the smallest possible costs). This chapter is therefore divided

into four sections that allow practitioners to understand whether a supply chain

managementapproach offers a strategically viable choice for their company:

section 1 describes the basic principles behind makebuy selection and provides

a decision-making framework;

section 2 explains when a firm should insource particular supply chain resources

as a core competence;

section 3 outlines how SCM approaches are more ambitious investment decisions

for the firm than the other three sourcing options because of the demands they

make on managerial time;

section 4 concludes by showing how this basic framework can be operationalized

through the use of three strategic sourcing decision-making templates.

SELECTING THE RIGHT SOURCING STRATEGY

Management decisions are investments because they carry with them costs that

are expected to yield returns. This is true even if the cost is the time that it takes

to perform a task. Time, like everything else, is a scarce resource. If companies

spend it pursuing unprofitable activities, then they lose the opportunity to do

something more profitable.

The return that a company receives from any investment is highly variable. It

depends upon what the action is intended to achieve. The yield may take the form

of the firm getting the right man for the job in the case of a human resource

manager properly chasing up references. Alternatively, it may take the form of

reduced production downtime in the case of an operations manager putting in

place a rigorous programme of repair and maintenance.

For the sourcing manager adding-value means receiving the right products or

services from vendors on time, or streamlining operational and logistical processes,

or obtaining simple cost savings. It could also, of course, be a combination of all

three of these potentially beneficial outcomes.

As with all investments, however, the attainment of any of these goals is

speculative because risk is involved in their achievement. Time spent trying to

develop a supplier may take weeks or even months of effort but offer very little by

way of tangible return. Consequently, strategic sourcing competence specifically

requires that sourcing managers take the options that offer the firm the best

investment return ratio after risk has been factored into the equation.


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INTERNAL INVESTMENTS AND THE MAKEBUY DECISION

When a firm insources it is using investors capital to develop productive capabilities

within the organization that will offer the firm a return in the form of an increasedrevenue-generating capacity. Whether the investment actually pays-off in practice

depends upon two major factors:

Does the firms enhanced internal resources lead to the creation of new (or

enhanced) products and services for which there is a demand that leads to

acceptable returns? Business history is replete with examples of new products

that failed to find favour with the public, and up to 80 per cent of all new

product offerings fail to either capture sufficient market share or sustain

profitability over time.

Does the firms investment provoke a competitive reaction that squeezes margins?

When new products and services come to market, if they are successful, the

normal response by competitors is to develop copycat items. When this occurs the

margins achieved by the first mover will be squeezed by competition.

Companies, therefore, have to think seriously about whether it is sensible to

insource activities or whether they should discontinue them. If activities are

essential to corporate strategy, and there is fierce competition, it may be necessary

to find cheaper ways of delivering required (but currently internally unprofitable)

activities by outsourcing these to external suppliers.Through outsourcing in this way a company may be able to achieve competitive

advantage by finding lower cost or more efficient suppliers than its competitors.

In this way the company may increase its own internal margins, as well as offering

customers better value and/or lower cost products and services.

In recent years many firms have assumed, therefore, that less is more. There is

a widespread belief that there are significant competitive gains to be obtained

from redrawing the boundary of the firm so that suppliers handle more of the

production, with the outsourcing company focusing on strategy, marketing, sales

and supplier contract management.

One survey indicated that 73 per cent of respondent companies were

contemplating outsourcing their printing services; over 63 per cent were considering

outsourcing travel services; and nearly 60 per cent wanted to outsource pensions.

More significantly, however, 26 per cent believed that marketing and research and

development could be safely outsourced (3i, 1994). In a similar survey 12 per cent,

27 per cent and 34 per cent of respondents respectively felt that manufacturing, legal

services and IT services would be outsourced by 2001(PA Consulting Group, 1996).

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The motives behind these initiatives can be highly varied. Three key drivers

behind the outsourcing phenomena have, however, been isolated (Lonsdale and

Cox, 1998):

1. Cost reduction. Cost reductions are obtained from reducing internal

headcount or through the vendor offering greater efficiency in its production

or servicing techniques. A firm that specializes in a particular activity is often

able to consolidate its clients spend to obtain significant economies of scale.

2. Converting fixed to variable costs. The move to quarterly results focused on

double-digit returns has forced many companies to seek the approval of

investors by outsourcing currently in-house competencies that are required

only occasionally, or for which the company is not able to undertake the

necessary internal investments to retain state-of-the-art capabilities.

3. Improve time to market/plug the competitive gap. In industries subject to

rapid technological change, the ability to maintain a cutting-edge across the

board can be problematic. As a result, delays in new product launches may

occur that can undermine a firms competitiveness. The ability of a firm to

outsource part of the innovation process to suppliers (who possess the

complementary resources that it lacks) can plug this competitive gap.

The first two drivers outlined often make short-term commercial sense for

companies, assuming that they understand the contractual risks in outsourcing

non-core activities. The third driver is more problematic because it touches onissues that go to the very heart of a companys revenue-generating capabilities.

Companies need to be concerned not just with the costs of ownership but also

with the risks of non-ownership of key supply chain resources. Some resources are

essential to wealth creation. Transferring ownership of these resources to a

supplier not only threatens to de-skill the company but also imposes substantial

sourcing costs on the firm in the long term. The scale of these risks can be

illustrated by considering the case of IBM and Microsoft, quite possibly the

biggest outsourcing mistake in contemporary business history (Case study 2:1).

Case study 2.1

The IBM/Microsoft case

IBM invented the PC and made the theoretical basis of the architecture transparent by

publishing the basic details of how it worked. This allowed new entrants to develop

competing products. The most successful of these was Apple, who were able to reverse

engineer and produce a more customer-focused PC than IBM. The Apple PC had a monitor

and a windows-style software operating system. This was preferred by customers to the

cumbersome IBM system because, at that time, it did not have a monitor or a click and

move software operating system.


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This forced IBM, who was taking considerable time to develop a customer-focused

operating system, to find a quick-fix for its own products so that it could compete with Apple,

who was winning large market shares. IBM believed that the operating system that it was

perfecting (and that would become known as OS2) would eventually be superior to anythingthat currently existed in the marketplace and that it needed to find a competent supplier

with a reasonable operating system until its own system was perfected. IBM firmly believed

that once its operating system was available it would be state of the art and that everyone

would switch to it.

IBM then sourced its initial operating system from a small fledgling company called

Microsoft but used a short-term royalty-based contract, under which Microsoft retained the

intellectual property rights in the software, because IBM assumed that it would purchase a

maximum of 100 000 units. The contract was not exclusive to IBM and Microsoft was

allowed to sell the operating system to anybody else.

Eventually, when IBMs operating system was available, it discovered that nobody wanted

to switch to its new OS2 system from the now industrial standard operating system owned

by Microsoft. In effect IBM had outsourced the critical asset in the supply chain the

operating system to one of its suppliers.

The problem for IBM was that when it came to market, nobody would pay the switching

costs of retraining their staff to the new OS2 system. This was because they were all

standardized on the original IBM operating system that, unfortunately for IBM, did not belong

to them but to one of their suppliers Microsoft. The rest is history. Microsoft is now a much

more profitable and successful company than IBM, which no longer makes double-digit

returns, unlike its supplier Microsoft.

The point of this case study is to demonstrate that companies must be very careful

when they pursue SCM approaches that require them to focus on their core

competencies. One key requirement is that they do not outsource the critical

assets in their supply chains to their suppliers (Cox, 1997).

Deciding what should be insourced and what can be safely outsourced is,

therefore, no simple matter. This is a key strategic decision that requires a

company to consider the following issues relating to the external commercial

environment as it thinks about what its core competencies should be:

Is there a demand for the products and services that the firm is trying to develop?

Is the product capable of satisfying a value proposition that customers want or

need?

Is demand effective? Is there a constituency that will not only like the product

but will also be prepared to pay for it (and in sufficient numbers and at the right

price)?

Do other firms already offer similar, better or cheaper products? Is there a gap

in the market that the firm can profitably fill or is the marketplace saturated

with too many competitors?

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Internally, the firm must also consider:

Of the resources and capabilities necessary to bring the product or service to

market that are critical to the process of competitive differentiation andrevenue creation, which must be insourced at all costs and which are non-

critical and can be safely outsourced?

The answer to this question depends on what is the basic strategy of a company.

Traditionally there has been a view that companies have only two basic choices

about business strategy (Porter, 1985). We believe, however, that there are in fact

three basic strategic options available that companies can attempt to pursue:

A firm can pursue a competitive strategy ofproduct differentiation by creating

products that perform better than those of its rivals. This could take the form

of bread that is more white or brown, softer or more granular. In the IT market

differentiation might take the form of computer chips that process data faster.

Alternatively, in a pharmaceutical market, differentiation might focus on drugs

that cure more people, more quickly and with fewer side effects.

On the other hand, if a market has become commoditized, and there is little

scope for further product differentiation, it may be necessary to pursue a

strategy of cost leadership. This involves a company seeking to increase its

market share by producing more cheaply than its direct competitors.

A third option is topass value to customers on a continuous basis by pursuing

product differentiation and cost leadership at the same time. This is the general

approach of Japanese car companies, like Toyota and Honda. These companies

seek to provide greater use value to the customer and at a consistently lower

cost and on a continuous basis. Dell is currently attempting to do the same in

the PC marketplace.

The problem with this latter approach is that the company may win market share

but with only relatively low profit margins. This problem also exists for those

pursuing cost leadership strategies. It is only those able to differentiate that can

normally achieve higher than normal profits because they are able to providesome mechanism by which competitors are not able to replicate their activities.

It is interesting to note, however, that it is those companies that have historically

pursued the strategy of passing value to the customers, and those that have to pursue

cost leadership, that have been the most active in outsourcing and SCM approaches.

Product differentiating companies do not necessarily have to pursue these

strategies, although they may a still seek to maximize their profitability by

retaining all the cost reductions that they can generate from their supply chains.

Cisco is a company that has been able to achieve product differentiation while at


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the same time pursuing SCM approaches, especially, in their case, by using the

latest Internet and e-business technology.

Regardless of whether a company is pursuing product differentiation, cost

leadership or the passing of value to the customer it must at all costs retain in-house

all those activities that set it apart from the competition. If a companys advantage

lies in R&D and marketing, then it may be safe to outsource manufacturing. If the

firms advantage lies in the internal efficiency of its production capability, then it

would not be safe to outsource this competence.

Finally, when considering what is core or non-core to its business, a company

must understand whether its differentiator(s) can be defended. Critical resources

and capabilities should be sustainable. It is necessary, therefore, to consider the

barriers to competitive imitation (Rumelt, 1997):

Information impactedness. This means that the knowledge on which an advantage

is based remains largely tacit and uncodified. Unless key personnel within the

organization opt to defect to a competitor, it is hard for the competitor to

determine the causes of success.

Causal ambiguity. This arises when the processes leading to differentiation are

especially complex and difficult to unravel by the differentiators themselves.

Reputation effects. This arises when products are difficult for the customer to

evaluate prior to purchase, making them risk averse. In such circumstances

customers often purchase on the basis of brand and reputation, regardless of

whether the competition can provide better alternatives.

Buyer costs of switch. The reluctance of customers to switch from one supplier

to another may go beyond a simple case of risk aversion. It may be because

once a customer has bought into a suppliers technologies it finds itself locked

into them.

Clearly companies considering SCM approaches that require them to outsource

non-core activities will need to be cognizant of the key issues outlined above.

Key learning point 2.1

The lesson from companies successfully pursuing SCM approaches is that

they always understand which skills and capabilities (competencies) are

critical assets for their own competitive advantage, and these are always

retained in-house.

Only those skills and capabilities (competencies) that are not critical to

competitive advantage should be outsourced and managed by external

suppliers.

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EXTERNAL INVESTMENTS AND THE FOUR GENERIC

SOURCING STRATEGIES

Just as the question of what should be insourced and outsourced is an investment

decision, the same can be said of the choice a company makes about which of the

four generic external sourcing strategies supplier selection, supply chain

sourcing, supplier developmentand supply chain management it should adopt.

Clearly, a company must choose that approach which is the most profitable for it

to adopt.

Even the most reactive short-term strategy requires an investment. This can be as

minimal as the time required to research and negotiate a contract and place an order.

For some of the more ambitious proactive strategies available to the outsourcing

company, however, the investments required can be substantial. These can cover

internal administrative costs as well as any dedicated investments that must be made

to mange suppliers effectively.

Generally reactive strategies represent a cheaper option for the firm than proactive

strategies because the up-front investments are largely administrative. By contrast,

in proactive strategies the investment process involves the product development

process as well.

Reactive and proactive strategies also differ in respect to the benefits to be

realized. With reactive strategies the return normally takes the form of the

negotiation of better deals from suppliers. In the case of supplier selection thesegains are confined to the first tier; while in supply chain sourcingthey extend into

the supply chain. Proactive approaches normally involve additional benefits such

as continuous waste reduction and/or product development, either at the first tier

or throughout the supply chain. As a result, when considering proactive strategies

it is also necessary to think about the ownership of exploitable technologies.

Sourcing strategy choices also carry with them an element of risk. For example,

a manager might spend many hours researching a supply market in an attempt to

obtain a better deal, only to find that the firm already receives the best possible

price. Similarly, many proactive strategies can involve the outlay of considerable

sums of money with no observable return. In the defence industry, governments

often discover that weapons systems do not materialize, or are late and/or over

budget, despite considerable efforts by the buyer to develop the supplier and their

supply chains.

There is an additional factor that must be considered when selecting one of the four

sourcing strategies. Sourcing strategies are necessarily co-operative undertakings

because they require two separate organizations (the buyer and the supplier) to

interact. At the same time, because they involve two separate organizations that


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normally seek to pursue their own corporate interests, an element of conflict must

exist in any relationship, with each side attempting to maximize its potential gain.

This insight leads us to conclude that power must impact on this process,

because the relative power resources of the buyer and supplier will determine

which side (if any) assumes the majority of the risk in any relationship and which

side (if any) will obtain the majority of the subsequent gains.

Generally speaking, in an ideal world, it is better to be powerful (in a position

to assign risk and appropriate the maximum share of value) than to be weak and

dependent in any sourcing exchange relationship.

The basic framework that informs the strategic choice about sourcing strategies

is outlined below:

1 Firms need to understand the cost-reward ratios associated with each strategic

option if they are to make the right choice. The best strategy is the one that

offers the greatest gain for the smallest investment.

2 In this context, the basic rule of thumb is that proactive strategies are more

resource intensive than reactive strategies.

3 This is because they require not only administrative investments but may also

require direct financial contributions in order to realize any prospective gains.

4 The potential gains may or may not be greater for proactive sourcing, it

depends upon the particular case. However, the gains tend to be wider in their

scope. They involve product development and process improvement as well asbasic price reduction.

5 Complicating the decision-making process is the concept of risk. It may make

more sense to pursue a low-cost strategy that has a high probability of

delivering modest gains than to pursue a high-cost strategy that offers a

potentially big pay-back, but with only a small probability of success.

6 Complicating the decision-making process is the question of power. This is

because power determines which party will assume the risk and which party

will appropriate the benefits. For example, an advantageous power position

may enable a buyer to pass the risks to the supplier while disproportionatelyappropriating the benefits.

A simple hypothetical example can be used to illustrate this decision frame (see

case study 2.2).

Case study 2.2

Choosing between supplier selection and supplier development

In this example a supply manager is asked to choose between Option A (Supplier Selection)

and Option B (Supplier Development).

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In the case of Option A, the buyer is operating in a weak power relationship with its supplier.

In the case of Option B, the buyer starts from the same power position but understands that,

as a result of investments that both parties must make in the relationship, both parties will

move to a situation of interdependence.In Option A the firm believes that its supplier is padding costs. For this reason the

company wishes to increase competition by bidding the business to force the incumbent

supplier to reduce their costs. This approach requires an investment in management time

costing 1000. Given the volume of business that the firm has with the supplier, it has been

calculated that there is a reasonable probability that, through this initiative, the firm can

save 4000. The expected pay-off for the firm can be calculated easily enough by

multiplying the expected return and then subtracting the up-front cost. In this instance the

expected pay-off would be 4000 less 1000 = 3000.

Supplier selection is not, however, the only option available to the buyer because it can

also pursue Option B (Supplier Development) with the incumbent supplier. What the firm

needs to know is which of the two strategies offers the better return.

Supplier Development is a more expensive alternative because it will require not only the

administrative costs of 1000 but also an additional investment to augment the suppliers

manufacturing capability. This cost of dedicated investments in the relationship is estimated

at 4000. It has been calculated that the subsequent gain will, however, generate savings

of the order of 24 000.

What is the pay-off in this instance? Under conditions of interdependence, buyers and

sellers can be expected to share the risks and rewards of any initiative. Since the buyers

administrative costs are 1000 and its share of the dedicated investments are 2000 (50

per cent of 4000), its exposure totals 3000. The costs for the supplier are the same at

3000 for administrative costs and dedicated investments.

If the initiative works, it will deliver gains of 24 000 but the buyer and supplier will each

have to find 3000 (= 6000) and share the net gains (24 000 less 6000). This leaves

both parties with a half share of 18 000 = 9000 each. Consequently, the case for a

strategy of Supplier Development appears, in this situation, much stronger than that for

Supplier Selection.


The attractiveness of particular sourcing options is likely to be highly sensitive

to changes in four key variables. These are:

the level of investment required;

the returns anticipated;

the risks that may arise from adopting a particular option;

the power of the buyer and supplier to assign risk and reward on the other

party.


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SELECTING STRATEGIC SOURCING OPTIONS

In practice, selecting the appropriate sourcing strategy is an art rather than a

science. Often it is not possible to obtain accurate data on the costs, returns andrisks surrounding any sourcing investment. As a result, most managers have to fall

back on collecting data that are indicative of what is likely to result from the

adoption of a particular option.

What follows is a series of templates designed to assist managers in making

comparisons between the four sourcing options available. Figure 2.2 allows

managers to understand the cost side of the equation. Figure 2.3 allows managers

to analyze the risk elements and Figure 2.4 does the same for the returns/rewards.

When considering any category of spend that it may be deciding to outsource to

the supply market, it is essential that the buying company undertakes the followinganalysis for each of the four sourcing options that it might pursue.

Calculating and allocating costs

Fig. 2.2 Calculating and allocating costs

Phase I: The nature of the investment

In Phase I it is necessary to identify and collect data on the various types of cost

associated with the planned strategy. This includes data on the different

27

Phase I

Nature of the investment

Investment type

Administrative

Dedicated

Other

CostBuyer

H/M/L

Supplier

H/M/LBuyer Supplier

Upfront cost Ultimate cost

Buyer Supplier

Relative demandthat investment

would make

Structure

ofpower

Allocation of cost

Phase II Phase III Phase IV


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28


administrative tasks that the firm must perform, plus data on any dedicated

investments that the initiative requires. The table calls for cash figures whenever

possible. Consequently, if the initiative will take one full-administrators time for

two months and the administrators salary is 2000 a month, then a figure of

4000 would be entered into the column. Similarly, if the initiative requires one

or either of the two parties to invest in specialized investments in support of the

relationship, then this combined total should also be recorded.

Phase II: The relative demands made by the investment required

The methodology asks the company to calculate any necessary investments but it is

important to remember that there are a number of other issues at stake. Any

investment is relative to the resources that a firm has at its disposal. Companies in

a cash-rich industry (like pharmaceuticals) can often afford to throw money at a

problem. A small company working in the fourth-tier of an automotive supply chain

may not have the personnel or time to consider a proactive initiative of any sort.

Consequently, managers need to consider not just what the upfront cost is but

also what extent the activity is likely to divert scarce resources away from more

productive uses. Generally speaking, therefore, supplier developmentor supply

chain managementtend to be reserved for either major items of spend (i.e. areas

that the firm spends a lot of money on) or commercially sensitive areas (i.e. areas

that contribute to, but are not necessarily essential for, the maintenance of the

firms core competencies).For this reason the template provides in Phase II the opportunity to record data

pertaining to the relative demands of the investment on both the buyer and the

supplier. If the firm wishes the initiative to work, it must be sensitive to the

demands that it makes on its own and the suppliers time and resources. If the

supplier is overextended, they may not wish (or indeed be able) to deliver.

Phase III: The structure of power

Phase III allows the company to record data relating to the structure of power that

exists between the buyer and the supplier. For further details refer to thediscussions in Chapters 1 and 3 where the Power Matrix (Figure 1.2) can be used

to understand the current power situation.

For the reasons already covered, different power structures will allow costs,

risks and rewards to be divided in different ways. In the case where the supplier

is dominant, for example, the buyer can expect to foot most of the bills up-front

regardless of the ultimate success of the relationship. In an interdependent

relationship, both parties would expect to take a more equitable share of the risks

and rewards.


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Phase IV: The overall allocation of costs

Phase IV allows managers to allocate the expected division of cost between the

buyer and the supplier. This includes the up-front as well as the final costs

(regardless of whether or not the initiative is successful).

However, managers also have to be able to calculate the costs to their organization

should something go awry. Contingency planning, after all, is part and parcel of

good management. It is possible, for example, that the administrative effort required

has been under or overestimated. It is also possible that the commitment for

dedicated investments has to be revised in the light of new developments in

technology or because of a misunderstanding of the true costs of the initiative before

project commencement.

Whatever the reason, should the costs spiral the additional expenditures need to

be allocated. Furthermore, how they are allocated will determine just how

profitable the initiative proves to be in the long run.

Calculating post-contractual risk

Firms have to be particularly careful because proactive strategies can expose them

to significant contractual risk (what some analysts refer to as moral hazard).

Sustaining the commitment of a supplier depends upon a firms ability to motivate

them. Motivation can take the form of a carrot (bonuses for good performance) or

a stick (the cancellation of the initiative or the whole contract if the performanceis poor).

In order for the incentive structure to work it must be credible. This means

being able to monitor the supplier to see if they are complying with the terms of

the deal and having the ability to punish the supplier (by invoking penalties or by

threatening exit) if they are not.

The buyer must, therefore, be able to spot those areas where there is significant

scope for opportunism by the supplier (in this case in the form of trying to

renegotiate the riskreward allocation) and be able to craft safeguards against the

risk. Where contractual safeguards cannot properly be introduced, then the firm

is probably better to retain the competence within the organization rather than to

outsource it.

Moral hazard is frequently a problem in supply management because effective

monitoring is always an issue. However, sometimes the risks are particularly

acute. Contracting that takes place in a highly volatile or uncertain environment

is difficult because it raises the issue of renegotiation. Buyers attempt to draft

contracts in as complete a fashion as possible, but when an environment is

particularly volatile, specifying all the terms of an agreement in advance is likely

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30


to prove next to impossible. This in itself need not present a difficulty unless the

firm becomes locked-in to its outsourced provider. If this happens, the supplier

may choose to renegotiate on terms that benefit it rather than its customer.

Contractual lock-in occurs if the contract requires the buyer to make some form

of highly specialized investment in the relationship. The investment might take the

form of time. An organization that has spent months negotiating and implementing

an outsourced relationship might be reluctant to write-off all of this hard work

especially if re-sourcing means repeating the effort with no greater chance of

success next time around. Alternatively, firms might have made substantial and

non-fungible investments in specialized training or equipment (otherwise known as

asset specific investments).

Less creditably, though, firms are often reluctant to call time on a poorly

performing supplier if the managers who negotiated the contract have a significantreputational investment in the deal. Calling a halt to the affair means admitting that

they got it wrong, and nobody likes doing that. Whatever the form of the lock-in,

the effect is the same: the firm loses its capacity to impose costs on the supplier and

thus its ability to impose discipline.

Of course, just because a contract presents the firm with a risk, it does not

follow that the risk cannot be managed. For example, one strategy often pursued

by buyers involves unbundling a contract. This means separating out those

elements that pose a risk from those that do not. The highly risky elements are

retained in-house and only the less risky elements are outsourced. The supplier

may even be asked to post a bond, or share the costs of the dedicated investments,

as a sign of its good faith (i.e. to show that its word of honour and commitment

to the relationship is credible).

The purpose of Figure 2.3 is to record and analyze the risks described above by

dividing the issues into four broad phases of analysis.

Phase I: The pre-contractual power position

Phase I simply records the pre-contractual power situation and this can be taken

from the analysis shown in Figure 2.2.

Phase II: The risks of lock-in and dependency

Phase II itself divides into four parts. The first allows the manager to describe the

nature of the investment required to support the relationship. This description can

be transferred from Phase I of Figure 2.2. It is then necessary to indicate the extent

to which the investment required is asset specific (i.e. necessary to make this

relationship work). If it is, then it is necessary to record which of the contracting

parties (buyer and/or supplier) is commercially exposed.


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Fig. 2.3 Calculating post-contractual risk

Phase III: The post-contractual power position

If the investments on both sides are small, it is unlikely that the power relationshipwill have changed at all, however, if they are substantial and asymmetric, a shift

may well have taken place.

Phase III records the post-contractual power situation once the required

investments have been made. Again the matrices linked to the Power Matrix in

Chapters 1 and 3 can be used to ascertain whether the selected sourcing strategy

is likely to lead to a power shift. This is most likely in proactive approaches

because these relationships often require dedicated investments that do not always

come with adequate safeguards against post-contractual lock-in.

Phase IV: Understanding contractual uncertainty

Phase IV requires a consideration of contractual uncertainty. Companies need to

indicate the level of confidence (high/medium/low) they have that their initial

investment estimates will be valid. Should confidence be low, it will be necessary

to indicate whether the costs will ultimately be revised downwards (or more

importantly) upwards.

If it is concluded that there is a significant risk that estimates regarding one of

the more substantial areas of investment are soft, then it will be necessary to

31

Phase I

Investmenttype

Is thiscost

sunk?

Is thefirm

locked-in?

Isvendor

locked-in?

H/M/LRevise

upRevisedown

Net gainer/loser fromthe revisedinvestment

plan

Post-contractualstructure

of power

Lock-in-risk Confidence ininvestment planPre-contractualstructure

of power

Phase II Phase III Phase IV


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32


allocate this exposure between the buyer and supplier. If it is likely that the

initiative will lead to the company being locked into a relationship, and the cost

figures are also considered soft, it may well be that the strategy does not make

commercial sense. If the gains from the investment justify the initiative, it may

make more sense to internalize (insource) the activity within the firm.

Calculating the return

Figure 2.4 allows companies to think about the returns from any investment. How

some of these gains may be calculated operationally is covered in Chapter 4, which

deals with the operationalization of SCM techniques. Figure 2.4 is restricted to

recording projected gains and losses.

Fig. 2.4 Calculating the return

This is not straightforward because the concept of Value for Money (VFM) must

be understood by linking functionality with cost options. Improving VFM can be

achieved in the following obvious ways:

improving functionality while reducing cost;

improving functionality while maintaining cost;

maintaining functionality while reducing cost.

Phase I

Genericnature of

change inproductoffering

ReactivePrice and/orfunctionality

change

ProactivePrice and/or

functionalitychange

ProactiveEfficiency

(total costsof ownership

change

Proactive

Revenuegenerating

opportunities

Type of change

Value of change

Positive Negative Neutral H/M/LRevise

upRevisedown

Confidence in change Projectedgain/loss

frominitiative

Phase II Phase III


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However, it can also be achieved in a number of less obvious ways:

improving functionality while increasing cost (where the functionality increase

is greater than the cost increase); reducing functionality while reducing cost (where the fall in functionality is less

than the fall in cost).

It is not, therefore, necessary for all the elements of a deal to improve in order for

the deal itself to improve. Figure 2.4 attempts to capture this through three phases

of analysis.

Phase I: The expected changes in functionality and costs

of ownership

In Phase I the company must describe the changes that are expected to arise as a

result of the adoption of the chosen strategy. These may conceivably fall into one

of four broad options:

If the strategy is essentially reactive, then it is likely that changes in performance

by the supplier will be linked either to the initial purchase price and/or to

increases in functionality of the product or services offered to the buyer.

If the strategy is proactive, there are potentially three major changes possible.

The first is a change in the initial purchase price and/or functionality. The

second arises from a change in the total costs of ownership through supplychain efficiency gains (this is only possible when supply chain initiatives are

being undertaken). The third is an increase in revenue generating capability, as

a result of innovations from the initiative that generate isolating mechanisms

that contribute to competitive advantages in market closure and/or sustainable

increases in profit margins.

Phase II: The value of the change

Phase II requires that the value of the change for the buyer is recorded. Three

options are available:

Positive. The initiative either results in value for money benefits for the buyer

such as reduced prices and margins from the supplier; improved efficiency;

improved functionality, or delivers exploitable new technologies.

Negative. The initiative provides value for money benefits for the supplier and

undermines the current value received by the buyer.

Neutral. There is no discernible change in value for money for the buyer.

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34


Phase III: Mapping uncertainty

Phase III allows uncertainty to be mapped. First, it is necessary to indicate the

degree to which the probability (high, medium or low) of the projected estimates

of achievable outcomes will occur or not. If the probability is medium or low, it

is then necessary to indicate whether the gains/losses estimated have been over- or

under-stated. Following from this it will be necessary to record a revised

projection of the anticipated reward structure.

CONCLUSIONS

Having completed each of the figures for a specific category of sourcing requirement,

and for each of the four sourcing options available, it should now be possible forcompanies to make a judgement about which of the four sourcing options available

for this category of spend appears to be the most strategically beneficial.


Any of the sourcing options available is worth pursuing if the projected

gains exceed the projected costs, after the pattern of risk has been factored

into the equation.

The strategy that is optimal is, however, likely to be that approach which

results in the greatest pay-off when all the four alternative sourcing approaches

are compared against one another for a particular category of spend.

It is clear that this approach to sourcing strategy selection may well result in an

answer that says a proactive SCM approach is simply not the most optimal

solution for the buying company. In such circumstances our view is that the

sensible company should opt to undertake the sourcing approach that is most

conducive for its commercial success. Obviously, if the analysis leads to the

conclusion that SCM is optimal, then the buying company should pursue this

option vigorously.

There is one additional caveat that must be addressed before such an approach

is adopted. Identifying what may be the most commercially profitable sourcing

option is not the same thing as identifying a strategy that will work operationally.

Before embarking on any sourcing strategy it is necessary to understand, first,

whether there are any major internal and external constraints that will so affect

implementation that the strategy cannot be made to work in practice, despite the

clear commercial benefits that may be achieved strategically. These issues are

discussed in the next chapter in relation to SCM strategies only.


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REFERENCES

Cox, A. (1997) Business Success. Helpston: Earlsgate Press.

Lonsdale, C. and Cox, A. (1998) Outsourcing: A Guide to Business Risk

Management Tools and Techniques. Helpston: Earlsgate Press.

PA Consulting Group (1996) Strategic Sourcing: International Survey. London:

PA Group.

Porter, M. (1985) Competitive Strategy. New York: Free Press.

Rumelt, R. P. (1997) Theory, strategy and entrepreneurship, in D. Teece (ed.)

The Competitive Challenge. New York: Harper & Row.

Womack, J. and Jones, D. (1996) Lean Thinking. New York: Simon & Schuster.

3i (1994) Outsourcing. London: 3i.

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1

Supply chain management andbest practice sourcing

Introduction 3



The key enablers of successful SCM implementation 9

Conclusions 12

References 13

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Supply chain management and best practice sourcing

INTRODUCTION

In recent years there has been considerable debate amongst consultants, practitioners

and academics about what constitutes best practice for those involved in sourcing.For many this debate has led to the conclusion that supply chain management (SCM)

constitutes best practice in the search for improved value for money relationships

with suppliers.

The evidence for this viewpoint is the increasing frequency with which old

purchasing, procurement and logistics departments have begun to re-brand

themselves as supply chain management functions. We have also witnessed the

development of SCM practices in all the major consultancy companies and the

creation of dedicated MBA and undergraduate degree programmes, as well as

departments of SCM within major American and European Universities.Over recent years we have taken something of a contrary view about the

appropriateness of this view of best practice (Cox, 1997a, 1997b, 1998; Cox et

al., 2000a). Much of our criticism of the SCM bandwagon has in the past been

based on deductive reasoning about the logical approaches to sourcing that must

be made under different circumstances of power between buyers and suppliers. At

the same time we have undertaken research into how power regimes create

opportunities, as well as problems, for buyers and suppliers as they seek to

implement particular sourcing approaches in changing circumstances of power

(Cox et al., 2000b, 2001).

Some of this empirical research has been reported already and it

demonstrates clearly that there are some circumstances in which buyers can

pursue SCM approaches successfully, but also that there are many, many

more circumstances when they cannot.

Cox et al., 2002

Despite this general conclusion it is clear that SCM practices when properly

conceived and implemented can provide one of the most powerful mechanisms

currently available for buyers to transform the supply offerings they receive from

their supply chains.

This short volume has, therefore, four major tasks:

to help practitioners understand whether or not it is appropriate for them to

undertake SCM strategically;

to help practitioners to understand if it is possible to undertake SCM strategies

operationally within their own organization, and with the suppliers within their

external supply chains;

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4


to help practitioners understand how to implement SCM strategies successfully;

to help practitioners understand whether there is any software and Internet-

based tool(s) that will facilitate the successful implementation of SCM strategies.

It is important for the reader to understand at the outset, however, that the general

argument of this book is that while SCM can be regarded as a best practice

approach for organizations under some circumstances, it is rarely best practice for

companies in most or all of their external sourcing circumstances. Given this, the

first issue to be addressed is not what is the most effective way to undertake supply

chain management, but if it is not always appropriate, what sourcing choices do

managers have?

The best way to address this issue is by first understanding, logically, the ways in

which buyers can work with any supplier and the scope of their activities within a

supply chain. By doing this 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.

THE FOUR BASIC SOURCING OPTIONS

Ways of working for buyers and suppliers

As Figure 1.1 demonstrates, buyers have two basic choices about the ways they

can work with suppliers. These are as follows.

Proactive ways of working

In this way of working the buyer independently (or jointly with the supplier)

designs and specifies in detail the stretch improvements in functionality and cost

of ownership that the supplier is expected to deliver now and in the future. The

buyer will obviously select the most competent suppliers available and undertake

robust and rigorous measurement and management of performance againstpredetermined stretch targets. The buyer will also be heavily involved in

developing the skills and capabilities of the supplier to deliver the required targets

through close and collaborative relationship management.

Reactive ways of working

In this way of working the buyers role is much more circumscribed since it is

normally the supplier who determines what the supply offering to the buyer will

be. The buyer is, therefore, rarely directly involved in the design and specification

of functionality and costs improvements. Here the buyer normally sources at arms


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length and relationship management is confined to short-term interactions, based

on the selection of the most appropriate supply offering and given the available

choices provided by currently available suppliers in the market. The buyer does not

directly drive innovation in this approach but encourages market contestation so

that, over time, competition provides innovation in functionality and cost.

Fig. 1.1 The four sourcing options for buyers

The scope and level of buyer involvement with supply offerings

Figure 1.1 also demonstrates that to achieve improved leverage of supply inputs,

buyers also have to make decisions about the scope of their involvementwithin the

supply chain that must be created for the delivery of particular goods and services.

First-tier relationship management

In this approach the buyer lacks the internal capabilities and/or external power

resources to direct innovation from the extended network of suppliers. The buyer,therefore, can only work with suppliers at the first-tier. The buyer can, of course,

choose either short-term arms length or longer-term collaborative relationship

management styles when sourcing at the first-tier.

Supply chain relationship management

In this approach the buyer has both the internal capabilities and the external

power resources to drive innovation on its own, or jointly, with the extended

network of suppliers within the supply chain (this can be in the total chain or

within significant elements of it). Here the buyer works beyond the first-tier

5

Proactive

Focus of buyer

relationship withthe supplier

Level of work scope with

supplier and supply chain

Supplier

development

Supply chain

management

Supplier

selection

Supply chain

sourcingReactive

First-tier Supply chain


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6


supply relationship to improve functionality and/or reduce costs on a continuous

basis, normally using long-term collaborative relationships.

The four sourcing options facing the buyer

Figure 1.1 further demonstrates that putting these four basic variables together

provides the buyer with four basic sourcing options. These are differentiated on

the basis of the level of external complexity and internal resource intensity that

must be managed by the buyer.

Supplier selection

This option is the one most commonly used by buyers in all types of organization.

Supplier selection implies that the buyers role is confined primarily to reactive

sourcing at the first-tier. This means that the buyer normally selects products and

/or services from the supply offerings made by suppliers currently operating in the

market, with analysis of the power and leverage opportunities between the buyer

and supplier confined only to the proximate supplier of the finished product or

service being sourced.

It is the supplier who designs and specifies requirements, with the buyers role

confined to market analysis of supplier offerings and, using robust supplier

selection procedures, the sourcing of the best value for money supplier(s). This

approach also normally requires robust performance measurement in order thatthe buyer can determine whether the supplier has delivered what was expected. If

it has been, then the supplier may expect to receive further orders from the buyer,

assuming no other suppliers can offer a better value proposition to the buyer

when contracts are reviewed.

Of all of the four options available to a buyer, supplier selection makes the least

demands on internal resources and requires the least commitment to long-term

collaborative external sourcing relationships.

Supply chain sourcing

The supply chain sourcing option is similar in many ways to the supplier selection

option. The major difference is that, instead of the supplier assessing the suitability

of suppliers at the first-tier, the buyer is now involved directly in understanding the

structure of the supply chain through which products and services are created. This

approach requires, therefore, that buyers develop rigorous and robust source plans

in order that the current power structures between buyers and suppliers within the

total supply chain can be understood.

Once again, however, the buyers role is confined to market intelligence (but now

within the total supply chain) rather than the detailed design and specification of


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supply offerings. The buyers motive in undertaking source planning is to understand

whether there are opportunities for effective leverage within the totality of the supply

chain relationships, rather than merely at the first tier. The buyer does not, however,

undertake a proactive role with the supplier or supply chain. The buyer in fact simply

assesses the scope to use the current leverage that is available if sourcing is

undertaken in the supply chain beyond the first-tier.

This approach makes more demands on the internal resources of the buying

company than supplier selection because it involves the development of competence

(and therefore the expending of scarce internal resources) on supply chain not just

first-tier information search and analysis. It also involves the development of more

supply relationships externally and, therefore, more external performance

measurement and relationship management responsibilities.

Supplier development

Supplier development refers to a process by which, having undertaken the same

initial type of analysis and selection as that outlined under Supplier selection

above, the buyer works on a continuous basis with the supplier to transform the

current trade-off between product or service functionality and the overall cost of

ownership. The key difference with supplier selection is that the buyer is now

heavily involved, not only in selection and assessment but also in the fundamental

design and specification of the product and service offering that the supplier will

provide now and in the future. Clearly, depending on the respective resources andcapabilities of the buyer and the supplier, this will either be determined by the

buyer or it will have to be a joint effort.

It is clear that this approach makes much greater demands on the internal

resources, as well as upon the external relationship management skills, of the buyer

than the two more reactive options outlined above. In this approach the buyer has

to commit considerable internal resources to the design and specification process,

as well as to external relationship management.

Furthermore, this approach requires that buyers and suppliers must normally

develop longer-term relationships. This is because, if both parties have to make

dedicated investments in the relationship to make it work, neither side is likely to do

this without some longer-term commitment. It is also essential that the power structure

is favourable to the buyer since it is unlikely that dominant suppliers will be willing to

respond positively to the design and specification requirements of buyers.

Supply chain management

The final option available to buyers is the most demanding of both internal resources

and external relationship management. The approach is similar in all respects to

supplier development except that, having first undertaken source planning, the buyer

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8


now assesses the scope to undertake proactive supplier development linking together

all the buyers and suppliers in the chain. The aim of this network relationship

management is to encourage the players in the chain to dedicate their business

strategies to the delivery of improved functionality and lower costs of ownership for

the ultimate customers in the chain.

It is self-evident that this approach, which incorporates the same selection and

performance measurement tools and techniques as outlined under the reactive

approaches provided earlier, is the most difficult for buyers to implement. The reason

being that two major enablers must be in place before any buying organization can

implement this approach. First, the buying company must have the internal

capabilities to shape the stretch design and specification requirements for the chain

as a whole and have the internal resources to embark on the complex and time

consuming role of developing all the buyers and suppliers within the chain.Second, there must be a power structure that is conducive to buyer-led supply

chain improvement. Obviously, depending on the power relationships within the

chain, it may be necessary for the buyer to work jointly with the buyers and

suppliers within the chain or, if the buyer has sufficient internal resources and

power over the players in the chain (or a substantial proportion of them), it may

be possible for the buyer to dictate what they will do.

WHICH OF THESE OPTIONS IS BEST PRACTICEFOR THE BUYER?

Our research and consulting activities over the last ten years have continually

reinforced one conclusion: whatever the hype, most buying organizations do not

in practice do very much SCM (Cox et al., 2001; Cox et al. 2002).

The reason for this is self-evident. Few buying organizations have either the

internal resources or the external power circumstances that are conducive to long-

term and continuous collaborative buyer and supplier relationship management.

This implies that, whatever proselytizers of SCM argue about it being best

practice, for the bulk of their spend, most practitioners will never be in a position

to implement it because the achievable gains are not worth the internal and

external efforts required.

This is not to deny that SCM is a most effective and appropriate thing to do if

the buyer is in circumstances conducive for its implementation. Unfortunately,

however, the empirical evidence seems to confirm that most buyers will only ever

have the internal resources and external power opportunities to undertake reactive

sourcing options.

It is imperative, therefore, that managers recognize this fact and that organizations

begin to analyze the objective circumstances they are in, so that they can properly


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understand whether they have proactive and/or reactive sourcing opportunities and

which of the four options outlined here is likely to be the most efficacious for

improved leverage in the future for any particular category of spend.

This is because our work with many companies over the last ten years has indicated

clearly that, while SCM may be possible and desirable in some industries like

automotive, food retailing, process construction, personal computer manufacturing,

chemical refining and aluminium (to mention just a few) this does not mean that

this approach is the most appropriate for buyers to adopt in all circumstances.

Indeed our research has demonstrated quite clearly that not only is it impossible

for the majority of organizations to adopt SCM approaches but also, and perhaps

more to the point, companies pursuing SCM approaches in their direct, revenue-

generating supply chains often find it impossible to do so in their indirect,

non-production areas of spend. In these circumstances even SCM-focusedcompanies are often forced to adopt supplier development, supplier selection and

supply chain sourcingoptions for some of their categories of spend.


Best practice cannot be about the development of any one particular sourcing

approach.

Rather best practice must be the ability to understand which of the four

sourcing options available is the most appropriate in any given circumstance.

THE KEY ENABLERS OF SCM IMPLEMENTATION

Our work has led us to conclude, therefore, that there must be circumstances

when SCM strategies can work and there must be circumstances when they are

unlikely to do so.

It is interesting that most SCM strategies seem to operate well in circumstances

in which the buyer has high volume and fairly regular and constant demandrelative to a supply market in which there are many suppliers, all of whom have

similar capabilities, and who are normally highly dependent on the buyer in one

form or another.

It is worth noting that many of the industries in which SCM strategies have been

pioneered the automotive, the aluminium, the chemical refining, process

manufacturing and process construction have these demand and supply

characteristics. But there are also circumstances where SCM strategies based on

longer-term collaborative relationship management approaches do not work well.

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It is interesting that SCM strategies do not appear to work well in circumstances

where the buyer has low volume and infrequent or ad hoc demand, and in which

there are dominant suppliers who are not dependent on the buyer in any form.

It is highly unlikely, therefore, that a buyer (individual or corporate) could currently

force Microsoft or Cisco to adopt SCM strategies against their will, or seek to

appropriate for themselves most of the increased value from working together. The

reason for this is self-evident. From a dominant suppliers perspective, unless a buyer

has sufficient volume relative to its alternative customers and unless that demand is

constant, there is no reason why it should work with any particular buyer to create

value-adding activities. Furthermore, there is no reason why it should want to share

any value created with its customers if it can keep such value for itself.

This is just another way of saying that demand and supply variables create a

situation of power and leverage between buyers and suppliers at all points in asupply chain we refer to this as the creation ofpower regimes within the

complex networks of buyer and supplier exchange that exist in any and all supply

chains for products and services (Cox et al., 2000b).

Unless managers understand the ways in which the power circumstances between

buyers and suppliers create opportunities for, and obstacles to, the development of

potential SCM strategies, then there is a significant risk that managers will be

pursing external sourcing approaches that are impossible to implement.

Given this, as Figure 1.2 demonstrates, the ability of managers to undertake

SCM strategies will be heavily dependent on the power relationships that exist

between buyers and suppliers within the supply chains that must be managed if

SCM strategies are to be implemented effectively. In deciding whether it is

strategically or operationally possible for buyers to undertake SCM strategies,

much of the initial decision will have to be made by understanding where the

buyer and supplier sit in The Power Matrix outlined in Figure 1.2.

Fig. 1.2 The Power Matrix between buyers and suppliers

Source: Cox, A. et al., Power Regimes, Helpston: Earlsgate Press (2000b) p. 18

High

Relative utility and

scarcity of buyers

resources for supplier

Relative utility and scarcity of

suppliers resources for buyer

Buyer

dominanceInter-dependence

IndependenceSupplier

dominanceLow

Low High


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As Figure 1.2 indicates there are four objective power situations that buyers and

suppliers can find themselves in:

Buyer dominance means that the buyer can control the relationship with thesupplier and can fix the price and quality trade-offs in the buyer and supplier

relationship.

Interdependence means that the buyer and the supplier are both heavily

dependent on one another and they must work together and jointly decide on

price and quality trade-offs in the relationship.

Independence means that neither the buyer nor the supplier have any resources

to determine and shape the specific relationship and both receive price and

quality on the basis of market competition and contestation.

Supplier dominance means that the buyer is in no position at all to shape therelationship with the supplier and must receive quality and price decisions that

are dictated by the supplier.

The significance of external power relationships for the effective implementation

of SCM strategies is outlined in far more detail in Chapter 3 where the second

major operational enabler is also discussed. This enabler is the issue of internal

capability. As Figure 1.3 demonstrates, there are always power circumstances at

play within organizations, as well as externally with suppliers. Our research has

led us to conclude that effective SCM strategies cannot be undertaken unless there

is clear support within an organization to make them work.

Fig. 1.3 Internal opposition and support for SCM strategies

Once again we discuss these issues in more detail in Chapter 3. It is worth stressing,

however, that unless there are more confirmed allies and potential allies than

enemies and zombies internally within an organization, it is unlikely that suchSCM approaches can ever be made to work successfully however conducive the

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Understand

what SCM is Enemies Confirmed a

cox, ireland et al - supply chain management (2003)

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