Supply chains and power regimes:

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1 pag.: 1 van 11 Supply chains and power regimes: Toward an analytic framework for managing extended networks of buyer and supplier relationships Source: The Journal of Supply Chain Management, spring 2001 Authors: A. Cox, J. Sanderson & G. Watson In the previous articles, the basic structure of the power perspective was outlined and two examples were provided of how buyer and supplier power can be augmented or challenged in simple dyadic exchange relationships. In this article, the discussion is broadened beyond the immediate buyer relationship with first-tier suppliers to take in the issue of how supply chains can, and should, be understood. The article is in three parts. The first section explains why current thinking about supply chains is primarily located within a descriptive paradigm. The second section explains how a more analytic approach to supply chain thinking can be developed. The final section explains the analytic concept of power regimes and discusses its practical utility. The current descriptive malaise in supply chain thinking The concept of supply chains is a relatively new phenomenon in business management thinking. The concept owes its development to the realization in the 1970s and 1980s that Japanese automotive manufacturers traditionally managed supply inputs beyond simple contractual relationships with first-tier suppliers (Nishiguchi 1994). Furthermore, Japanese manufacturers/assemblers of cars tended to manage their relationships in a more proactive and collaborative way when compared with Western practice (Sako 1992; Hines 1994). This collaborative and developmental approach is referred to as integrated supply chain management (ISCM). The reason for this is because the major distinguishing feature of Japanese practice was the fact that it was less arm s-length and more focused on the creation of jointly developed innovations in supply. These innovations were nearly always driven by the assembly and focused on the eradication of waste and inefficiency, so that better-value products (better quality at a lower price) could be passed to the final customers of the car manufacturers. This realization led to a reappraisal about how procurement and supply management should be conceptualized in the West. Rather than focusing only on the effective management of first-tier buyer and supplier interfaces, practitioners and academics began to think about the effective management of the extended chain of supply relationships. If Japanese practice focused on the extended network of dyadic relationships from raw materials to end products and services, then Western converts needed to find a conceptual way of describing the newly perceived best-practice approach for external resource management.

2 pag.: 2 van 11 This new concept was the supply chain. By a supply chain, one simply means the extended network of dyadic exchange relationships that must exist for the creation of any product or service that is supplied to a final customer. For a product or service to be delivered to a customer, it must start as a raw material of some kind and then pass through a series of stages of exchange between buyers and suppliers. At each stage, some form of transformation, or intermediation, must occur that adds value to the product or service as perceived by the buyer at that stage and, ultimately, by the final customer. Two examples of very different ideal-types of supply chain - one manufacturing and one service-based - are outlined below. Figure 1 demonstrates that for any manufactured product, a physical supply chain must exist that involves the value-added linkage of raw materials with other supply inputs to create subcomponents. These subcomponents are then linked together (often with other raw materials) to create components, which are brought together (transformed) into a subassembly. These subassemblies are then linked together to create final assembly products, which are shipped to final customers through direct, wholesale, and/or retail marketing channels. figure 1: a typical manufacturing (product) supply chain final customer retail wholesale final assembly components subassembly subcomponents raw materials Obviously, this is an oversimplification of the process, and not all manufacturing supply chains are physically alike. Some chains may have more or less vertical integration of the supply chain by the final assembly, while others may have outsourced most of the activities to suppliers. The key point is, however, that there is a recognizable network of dyadic exchange relationships in a manufacturing supply chain in which there are normally successive value-adding transformation and intermediation stages. Furthermore, all manufacturing supply chains involve the effective linkage of three flows: material, information, and money. Figure 2 demonstrates, however, that for service-based supply chains, the relationship may be far less complex. Pure service supply chains generally do not encompass material flow, rather they involve the effective linkage of information and money flows. The information flow normally requires the application of data as raw material with human knowledge and experience to generate know-how. Know-how is individual understanding of how to resolve a particular problem in an appropriate manner. figure 2: a typical pure service supply chain final customer know-how (intuitive or codified) experience information as a raw material

3 pag.: 3 van 11 This implies that the most significant stage in the service supply chain is human competence. It arises as a result of an individual s ability to understand how to use and apply information in a way that customers find useful. This competence (referred to here as know-how ) can be either tacit (intuitively held in the head of the individual and uncodified) or codified (written down and capable of being passed on to others through training). Consultancy companies are the classic example of pure service based suppliers. They seek to create supply chains that codify knowledge and information and make it practically available to help organizations behave more effectively. In practice, it is rare for supply chains to be categorized into simple manufacturing or pure service types. This is because what most organizations offer to their customers is normally a hybrid of products and services. Thus, the supply offerings of organizations tend to be an integration of a complex series of product and service supply chain inputs, as shown in figure 3. figure 3: a typical hybrid (product and pure service) supply chain final customer supply offering based on a product and service integration competence manufactured product supply chains pure service supply chains The discussion of supply chain types above is descriptive. Only the general nature of the properties within the chain have been discussed. While most writings about supply chains adopt this descriptive approach, recently there have been attempts to develop more sophisticated descriptive typologies of supply chains. Such initiatives differentiate between supply chains, not on the simple basis of what is done but on the basis of the types of products and services that are delivered by, and through, the supply chain. Saunders work is typical of this approach, as outlined in figure 4. Type of supply chain Extracts of raw materials figure 4: Saunders descriptive typology of supply chains Types of companies Manufacturers of goods Distributors of goods Service providers Production items Consumable / MRO items Capital items Goods for resale Services Adapted from Saunders, M. The Comparative Analyses of Supply Chains, 7th IPSERA Conference, London, England, 1998.

4 pag.: 4 van 11 Working in this same vein, Fisher has attempted to differentiate between supply chains, not on the basis of the products and services delivered but on the basis of the life cycle of the product. Thus, Fisher argues, as outlined in figure 5, that there are two types of supply chains. There are supply chains that provide standard products and services, which experience only a glacial change in the product life cycle. In these types of supply chains, long-term, lean, and efficient integrated supply chain relationship management approaches are required. On the other hand, Fisher argues, there are supply chains in which the product life cycle changes rapidly. In such supply chains, integrated supply chain management requires innovation, based on agile and flexible supply relationship management, to be the key to success (Fisher 1997). figure 5: Fisher s typology of supply chain types product types types of demand supply chain strategy functional products supply chain structure operational focus existing corporate products and services regular stable demand, with low profit margins innovative products unstable and short-life demand, with relatively high profit margins functional products, predictable demand, market size known, price sensitivity high supply chain structure innovative products, unpredictable demand, market size not known, price sensitivity less high efficiency through a focus on minimizing physical costs, competition on price is key operational focus focus on linking supply chain demand with product availability rather than cost, flexible response to uncertain demand is key Adapted from Cox, A. Business Success, Earlsgate Press, Boston, United Kingdom, 1997, p. 277 Some writers have gone further and attempted to replace this concept with the alternative of the supply network (Turnbull et al. 1996). This is because of the oversimplification of reality that arises when one refers to a web of complex dyadic relationships through the analogy of a simple linear chain. It has been a fundamental premise of this school of thinking about buyer and supplier relationship management that one must understand the complex, nonlinear network of relationships that exists for any product or service that is provided for an end customer. Figure 6 demonstrates the complex network of upstream buyer and supplier relationships that one might expect to find for any simple product or service. Toward an analytical approach to supply chain thinking There is, however, a serious weakness with these descriptive approaches to supply chains. All of these approaches fail to address directly what is arguably the most important issue in business management. This is the concept of power. While it is wholly appropriate for researchers to begin to descriptively map the complexity that lies behind the creation of any product or service, this is not sufficient for a proper understanding of why products and services are created or of how to participate effectively within any product or service supply chain.

5 pag.: 5 van 11 figure 6: the concept of the upstream supply network as buyer first tier suppliers second tier suppliers third tier suppliers raw material suppliers The real need is the ability to explain why products and services have been created in the form that they have. Only by being able to explain why any product or service has been created, who benefits from it, and in what ways, is it possible for practitioners to be able to know whether, and how, they are able to transform what currently is into something different. Describing supply chains in terms of the properties of the products and services provided can only take one so far. To be able to understand whether participation at any point in a supply chain is desirable or practical requires that the practitioner understand whether the ownership and control of particular supply chain resources will generate a sufficient financial return to make participation worthwhile. The creation of products and services is not primarily to provide value to customers, but to make money for those who are involved in the chain. Products and services are not provided because people want or need them. On the contrary, they are provided because organizations make money from their production and delivery. If organizations could not make money from producing and delivering goods and services to consumers, then even if people wanted or needed things, it is highly improbable that they would receive them. It follows that if one is to properly understand supply chains, and what can and cannot be achieved in them, it is necessary to move from a description of the physical properties of products and services in these chains to a more analytical understanding of the relationship between physical properties and the flow of value that occurs in the chain. Unfortunately, the concept of value is not as straightforward as one might assume in this regard.

6 pag.: 6 van 11 Value is used by commentators in three broad ways. First, it is used to refer to the utility that the customer derives from the product or service acquired. This is normally referred to as the customer s value proposition. Second, it is used to refer to the transformation process that takes place within organizations as they take less valuable supply inputs and turn them into more valuable supply outputs. This is normally referred to as the valueadding process. The third way in which value is used is in relation to the amount of money that is retained by any organization from participating at a particular stage in the supply chain. This is normally referred to as value appropriation. Each of these uses of value implies some sort of relationship between what is physically done and utility (the financial and nonfinancial benefits that are derived from doing it). A customer pays a price (x) and obtains utility (y) from the possession or use of a product or service. An organization physically transforms supply inputs at cost (a) and is able to sell a value-added product or service at price (b), generating a particular level of revenue. The same organization assesses the relationship between what it does physically, the cost of capital (y) to do so, and the revenue received, and then ascertains whether the costs of doing so allow it to appropriate sufficient value (y) to justify doing what is currently done at that point in the supply chain. Each of these ways of thinking about value is appropriate in business thinking. The first way - focusing on value propositions - enables organizations to think about the wants and needs of customers, as well as what must be done (and at which price) to win a larger share of the available market. The second way - focusing on value-adding processes - helps an organization to think about the unique activities that allow the organization to make distinct and unique products and services. The third way - focusing on value appropriation - allows the organization to think about whether what it does provides it with an acceptable return on its capital employed. It is this final way of thinking that is arguably the most important of the three. This is because, while the first two are necessary conditions of success in business, the third way is the sufficient condition. Appropriating value for shareholders is clearly the only real purpose for business organizations to exist. Most thinking in supply chain management is wholly focused on the first two approaches to value. It is for this reason that these approaches are primarily descriptive rather than analytical. To be properly analytical, supply chain thinking must encompass not only the description of what is done to add value to supply inputs, in order to meet customer value propositions, it must also understand and explain how value is appropriated, and by whom (Cox 1997). This leads to the conclusion that supply chain thinking must incorporate a holistic and inclusive understanding of the financial, as well as physical, properties of supply chain networks. The way in which this can be achieved is illustrated in figure 7.

7 pag.: 7 van 11 figure 7: supply and value mapping end customers paying 100% of the value (revenue) for the products / services supplied the value (revenue) chain the percentage share of the customer s revenu stream received at each stage of the supply chain the exchange relationship over value appropriation the supply chain the physical stages (resources) necessary for the creation and delivery of the final product / service raw materials suppliers value appropriation the net operating profits earned by individuals or companies participating in the supply chain Source: Cox, A. Business Success, , p. 207 Only if analysts are able to map the value appropriation that occurs in supply chain networks, and link this to the physical value-adding processes that must be in place to meet customer value propositions, will an analytical rather than a descriptive approach to supply chain and business thinking be developed. In so doing, it would be necessary to map the financial consequences of the power attributes that are possessed by buyers and suppliers in their complex Janus-faced exchange relationships with one another at each stage of the supply chain. This complexity of relationships is outlined in figure 8. figure 8: the complexity of dyadic power relationships There are many different buyer and seller scenario s each of which is a very different power structure. The key question under each scenario is what should be the best way for a buyer or a supplier to manage the supply relationship? many buyers many many suppliers buyers few many suppliers buyers one supplier few buyers many few suppliers buyers few few suppliers buyers one supplier one buyer many one suppliers buyer few one suppliers buyer one supplier

8 pag.: 8 van 11 As figures 7 and 8 indicate, organizations not only have to manage their value appropriation opportunities within a complex supply chain, but they have to manage internally a myriad of upstream and downstream buyer and supplier relationships. Interestingly enough, the complexity that organizations have to deal with when they act as buyers is not simply explicable in terms of the number of supply relationships they must manage. On the contrary, first-tier supply relationships must also be understood in terms of the extended network of power relationships that the buyer and its first-tier suppliers must manage. These extended networks of dyadic power relationships are called power regimes (Cox, Sanderson, and Watson 2000). Power regimes in theory and practice Figure 9 provides an analytical typology of 16 hypothetical buyer-supplier double-dyadic exchange scenarios. Each double dyadic exchange scenario is comprised of two interlocking buyer-supplier relationships, which are called A-B and B-C. Each of the dyadic buyer-supplier relationships is categorized according to the power relation that exists within it. The existence of buyer dominance is indicated by the symbol (A > B) or (B > C); supplier dominance by (A < B) or (B < C); buyer-supplier interdependence by (A = B) or (B = C); and buyer-supplier independence by (A 0 B) or (B 0 C). figure 9: value appropriation in double-dyad exchange scenario s Group 1 Group 2 Group 3 Group 4 Regime 1 Synchronised Buyer Dominance A > B B > C Regime 3 Downstream Dominance - Upstream Interdependence A > B B = C Regime 5 Downstream Interdependence Upstream Dominance Regime 7 A = B B > C Synchronised Interdependence A = B B = C Regime 9 Downstream Interdependence - Upstream Dominance A 0 B B > C Regime 11 Downstream Independence - Upstream Interdependence A 0 B B = C Regime 13 Upstream Dependence - Downstream Dominance A < B B > C Regime 15 Downstream Dependence - Upstream Interdependence A < B B = C Regime 2 Downstream Dominance - Upstream Independence A > B B 0 C Regime 4 Upstream Dominance - Downstream Dependence A > B B < C Regime 6 Downstream Interdependence - Upstream Independence A = B B 0 C Regime 8 Downstream Interdependence - Upstream Dependence A = B B < C Regime 10 Synchronised Independence A 0 B B 0 C Regime 12 Downstream Independence Upstream Dependence A 0 B B < C Regime 14 Downstream Dependence - Upstream Independence A < B B 0 C Regime 16 Synchronised Buyer Dependence A < B B < C Source: Cox, A., J. Sanderson, and G. Watson. Power Regimes, , p. 41

9 pag.: 9 van 11 Group 1 contains those regimes where A has power over B (A > B). Group 2 contains those regimes where A and B are interdependent (A = B). Group 3 contains those regimes where A and B are independent of one another (A 0 B). Finally, Group 4 contains those regimes where B has power over A (A < B). Each of these four groups has been further subcategorized on the basis of the power relation that exists between B and C. Each one of the four possible power relations between B and C is represented in each group. This is because the firm (B) stands between the source (C) and its final destination (A). This leads to the generation of 16 hypothetical double-dyadic exchange scenarios in total. The flow of value between exchange partners is held to operate according to the set of rules outlined in the first article in this volume and explained more fully elsewhere (Cox, Sanderson, and Watson 2000; Cox et al. 2001, forthcoming). Where a situation of buyer dominance or of buyer-supplier independence exists, it is contended that value flows from the supplier to the buyer (B to A, or C to B). In the context of independence, this occurs because competition in either B s or C s marketplace normally forces them to offer their respective customers a good deal. If they do not, the customers may go elsewhere. In the context of buyer dominance, value flows to the customer because the supplier has few alternatives for its products. Where a situation of supplier power exists, the value flows from the buyer to the supplier (A to B, or B to C). If there is no real choice in the supply market, or if firms in the supply market are cooperating to fix prices, then customers would not expect to get the best possible deal. Where a situation of interdependence exists, the pains and gains of the relationship will tend to be shared. In each extended dyadic exchange scenario, those actors within each regime that are in a position to appropriate and accumulate the available value are represented by a black square, while those from which the value is being appropriated are shown as a white square (see figure 9). This makes it easier to spot at a glance the winners and losers from each extended exchange relationship. The double-dyadic exchange scenarios discussed above provide a rather stylized version of how supply chain power relationships actually operate. It is possible, however, to apply the same rules to a more sophisticated representation of a supply chain and, in so doing, begin to demonstrate the analytic utility of the concept of power regimes. Supply Chain Power Regime 1 figure 10: value appropriation in complex power regimes B > C C C > F F A > B A 0 B B < D A B D D = G G B = E E E 0 H H Supply Chain Power Regime 2 B > C C C > F F A = B A < B B < D A B D D = G G B = E E E 0 H H Source: Cox, A., J. Sanderson, and G. Watson. Power Regimes, , p. 48

10 pag.: 10 van 11 In figure 10, two hypothetical supply chain power regimes have been constructed. These are based on the linkage of dyadic exchange relationships consisting of eight actors (A, B, C, D, E, F, G, and H). These actors have been joined together by means of seven exchange dyads (A-B, B-C, C-F, B-D, D-G, B-E, and E-H) to create a complex network of power relationships (power regimes) linked together to create goods and/or services for end customers. In effect, these could be seen as supply chains consisting of an end customer (A), an assembler (B), three components suppliers (C, D, and E), and three suppliers of raw materials (F, G, and H). In both of these hypothetical supply chain power regimes, the B-C relation (B > C), the C-F relation (C > F), the B-D relation (B < D), the D-G relation (D = G), the B-E relation (B = E), and the E-H relation (E 0 H) remain fixed. The only difference between the two networks is the A-B relation. Two of the four possible dyadic exchange circumstances are mapped onto this relationship in each power regime. Buyer dominance and buyer-supplier independence are grouped together in power regime 1, while supplier dominance and buyer-supplier interdependence are grouped together in power regime 2. In both of the power regimes, the value flows from F to C to B as a result of the series of cascading power relationships that operate to B s advantage. Like a series of Russian dolls, C appropriates value from F, only to see this value in turn appropriated by B. Similarly, in the double-dyadic exchange scenario containing B, E, and H, E is able to appropriate value from H by virtue of the independent relationship between them. E must then share at least some of this value with B, because these two actors do business on the basis of an interdependent exchange relationship. In both networks, however, B s grip on the value that it appropriates from each of these double-dyadic exchange scenarios is at best only tenuous. This is because, in the remaining double-dyadic exchange regime (containing B, D, and G), B is dependent on D and is, therefore, likely to be leveraged by D. At the same time, D s interdependence with G means that the benefits that D derives from its association with B are likely to be shared with G. As can be seen, the value appropriation outcomes on the supply (upstream) side of the assembler (B) are the same in both of the hypothetical exchange networks. The principal difference between the networks relates to the exchange circumstances that exist between B and its end customer (A). In power regime 1, B is assumed either to be dependent upon A (A > B) or to have an independent relationship with A (A 0 B). In both of these exchange circumstances, B is forced to pass value to A by pricing its product at or near the cost of production. Consequently, in power regime 1, B is being leveraged both by its customer and by one of its major component suppliers (D). Any value that B is able to appropriate in its relationships with C and E is therefore immediately passed on to A (in the form of low prices) and D (in the form of inflated bought-in costs). The profit margin being earned by B in these circumstances is likely to be extremely low.

11 pag.: 11 van 11 The value appropriation outcome from the A-B relation in power regime 2 is radically different. In this case, B is assumed either to be interdependent with its customer or to have power over A. As the diagram shows, however, the value appropriation outcome under both of these exchange circumstances is a function of B s dependence on D. Thus, where A and B are interdependent with one another, A is forced to share in the exploitation being visited on B by D. All of the value created by the association between A and B is appropriated by D, which then shares this value with G. Conversely, where A is dependent upon B, B is able to appropriate value from A by charging a price that is significantly above its cost of production. Nevertheless, B cannot retain this value in the form of higher margins, because it must pay the inflated prices being charged by D. As before, D shares the value that it appropriates from B with G. Conclusion: the analytical and prescriptive utility of power regime thinking It is clear, therefore, that this approach to analyzing the network of extended dyadic relationships that operate between buyers and suppliers in the complex networks of exchange adds an additional level of understanding to many of the current descriptive approaches toward supply chain categorization. Rather than focusing only on the physical properties of supply chain types, the power regimes perspective provides a way of thinking about who gets what, where, how, and when in the supply chain. Only by understanding the properties of power in extended dyadic exchange scenarios can a properly analytical and prescriptive approach to supplier and supply chain management be achieved. This is because a cursory reading of the power regimes perspective ought to sensitize the reader to the fact that buyers and suppliers cannot always create effective integrated supply chain management approaches. In certain power regimes, the buyer and/or supplier is in a position to block the passing of value from the upstream to the downstream end of the chain. In such circumstances, it is unlikely that proactive attempts to develop suppliers and pass value to end customers will be successful. Conversely, it suggests that attempts at integrated supply chain management may only be possible in circumstances in which either buyers and suppliers are interdependent, or because a buyer is the organization in the chain (close to the end customer and undertaking final assembly) and it can impose buyer dominance throughout the chain. In the absence of these power regimes, it is difficult to see how integrated supply chain management can be made to work effectively. If operational efficiency is to be achieved in a supply chain, then the flow of inputs from raw materials to the assembled good or service needs to be effectively coordinated. All too often, however, the requisite level of coordination cannot be achieved because supply chains are characterized by power regimes that are hostile to an uninterrupted flow of value from raw material providers to end customers. It is for this reason - the self-regarding efforts of some supply chain actors to appropriate value - that so many attempts at integrated supply chain management have failed and will continue to do so. This conclusion leads one into a further realm of complexity when considering power regimes. If power regimes have complex properties, based on the unique networks of extended dyadic exchange relationships that exist in the supply chain, then one approach to relationship management is unlikely to be appropriate for managing effectively within that power regime as a whole. This line of reasoning suggests that what may be appropriate in one subregime may not be appropriate elsewhere. This argument is developed further in the next article on power subregimes.