Processing firm-distributor firm outsourcing alliance

Case study of processing
firm-distributor firm
outsourcing alliance
Suku Bhaskaran
Food Marketing Research Unit, Victoria University, Melbourne, Australia, and
Helen Jenkins
Australian Prawn Farmers Association, Brisbane, Australia
Abstract
Purpose – The purpose of this paper is to review and discuss a distribution outsourcing alliance
between a small-to-medium scale food processor and a national distributor of frozen and chilled food
products. The paper discusses the influence of market dynamics, core and differentiated competencies
and strategic intents on alliance formation and operations in the small-to-medium scale food enterprise
sector.
Design/methodology/approach – The dyadic relationship of a small-to-medium scale food
processor and its distributor is investigated through reviewing past studies of processor-distributor
alliances, conducting in-depth face-to-face interviews with senior managers in both firms, and
reviewing documents and correspondence between the firms.
Findings – The partners do not complement their core and differentiate competencies to achieve greater
customer value creation through a joint enterprise business model. The alliance focuses pre-eminently on
short-term sales development and cost savings targets. Non-achievement of these targets adversely
influences partners’ trust and commitment to the alliance. A significant strength of the alliance is its
capacity to identify customer needs and use this knowledge to speedily develop and introduce new
products. In its present form this alliance is unsustainable. The partners should adopt a new philosophy
and vision to pursue an alliance that will use their core and differentiated competencies more effectively.
Research limitations/implications – To generalise the findings and inform theory building, the
research has to be replicated in other businesses and market environments. The findings are specific to
the market environment and strategies of a single small-to-medium scale food processor and a single
national distributor of frozen and chilled foods. Multi-case studies in multi-contexts (capturing varying
sizes of business, industry sectors, target market segments, competitive environments and market
environments) have to be completed to enable generalisation and theory building.
Practical implications – This paper demonstrates the disadvantages of pursuing distribution
outsourcing alliances with a short-term and enterprise level perspective. The case study provides real
life evidence of the benefits of pursuing distribution outsourcing alliances based on a joint enterprise
philosophy.
Originality/value – This paper contributes to knowledge on distribution outsourcing alliances, a
topic that several recent studies have identified as not having been explored in great detail in extant
supply chain studies.
Keywords Distribution management, Outsourcing, Strategic alliances, Joint ventures,
Small to medium-sized enterprises, Supply chain management
Paper type Case study
Introduction
In this paper, the term distribution outsourcing describes the exclusive multi-service
alliance that Z, a food processor, established with Y, a vendor. This alliance is much
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1741-038X.htm
JMTM
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Journal of Manufacturing Technology
Management
Vol. 20 No. 6, 2009
pp. 834-852
q Emerald Group Publishing Limited
1741-038X
DOI 10.1108/17410380910975104
broader than a supplier-reseller engagement. The intent was for Y to provide all support
functions relating to Z’s business development initiatives in a defined market. Z’s function
was to produce the goods. Y was entrusted to develop the market for these products in food
catering and independent grocery outlets throughout Australia by providing appropriate
transport, warehousing, logistics, promotional and personal selling services. This
description of the term distribution outsourcing conforms to that used in several past
studies. Outsourcing alliances are strategic initiatives that enable individual firm’s to
concentrate on their core competencies while drawing on the resources and capabilities of
other supply chain partners to provide specialised functions that improve operating
efficiency and value propositions to customers (Rodriguez et al., 2006; Quinn, 1999;
Mattsson, 1989). Outsourcing alliances can potentially increase customer satisfaction,
reduce switching behaviour by customers and therefore strengthen the competitive
position of all partners in the alliance (Shaw and Gibbs, 1995; Williamson, 1991).
Notwithstanding that many studies have elucidated the benefits of outsourcing
alliances, research on such endeavours is very much in its infancy. Several studies in the
past decade (Mikkola, 2008; Brannemo, 2006; Rodriguez et al., 2006; Cante et al., 2004; Cox,
1999a, b; Razzaque and Sheng, 1998) have implicitly or tacitly discussed the need to
conduct more detailed inquiry on outsourcing alliances. This paper aims to add to the body
of knowledge on outsourcing alliances in a defined context, distribution outsourcing
by small to medium enterprises (SMEs) in Australia’s food industry. The context of the
study and the method of conducting the study have significant influence on study findings
and therefore this study advances knowledge on distribution outsourcing alliance.
This paper presents the experiences and knowledge from a distribution outsourcing
alliance between Z, a SME food processor, and Y, a national distributor of frozen and
chilled food products. Discussions with Z’s managers revealed that they recognised the
need to access new markets to address declining sales in its traditional markets.
The managers identified that one of the following would be the most logical way for Z
to address its problems:
(1) undertake all functions in-house through investing in logistics and warehouse
infrastructure and recruit sales personnel with appropriate expertise;
(2) use one third-party logistics and warehouse provider but handle all sales and
marketing functions in-house;
(3) use several logistics and warehousing providers in different areas throughout
Australia and handle all sales and marketing functions in-house; or
(4) use one exclusive provider of logistics, distribution and sales services with Z
focussing on production.
Z chose option 4 as this seemed the most cost efficient and least resource intensive
strategy. Z’s decision was influenced by Y having contacted Z expressing interest in
becoming Z’s national distributor. Y suggested that it could help Z achieve its business
objectives and revealed knowledge, expertise and resource capabilities in marketing to
small scale independently owned food service and grocery stores.
The decision to outsource transport, logistics, warehousing and personal selling to a
third party was a major departure from Z’s current strategy of servicing its existing
customers directly. Z decided that it will continue to provide transport, logistics,
warehousing and marketing support to its existing customers, Coles and Woolworths,
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the large supermarket chains that dominate Australia’s grocery retailing. However,
it decided to use Y to provide all transport, logistics, warehousing and personal selling
support to access food service and independent grocery retail customers throughout
Australia.
Many factors influenced Z’s decision to enter into a distribution outsourcing alliance
with Y. Z recognised that it had to diversify and develop new markets. However, Z did
not have the knowledge and resource capabilities to successfully develop sales in
small-scale food service and retail grocery outlets. The independent grocery retail
sector accounted for only about 20 per cent of total retail grocery sales by value.
Compared to the large supermarket chains which Z currently serviced, the independent
grocery retail sector was not a major market. Substantial initiatives would be needed to
develop the new markets that Z was targeting.
The discussion in this paper is presented in four sections. The next section discusses
past studies as a means of elucidating the current state of knowledge on distribution
outsourcing alliances. Next, we discuss the methods used to conduct the case study. After
this, we present and discuss the case study including the motivations for establishing the
alliance and the strategic and relational issues that the partner’s experienced. The final
section of the paper presents the findings and conclusions of this paper.
Background
Market dynamics such as increasing levels of trade liberalisation including lowering of
tariffs, product-life cycle movements across markets and convergence in food
consumption behaviours have influenced firms to switch from strategies based on
competition to more cooperative modes of engagement (Vakoufaris et al., 2007;
Mikkola, 2008; Villalonga and McGahan, 2005; Caloghirou et al., 2003). A globalised
and increasingly competitive business environment often demands that firms pursue
collaborative initiatives to succeed. Some studies even contend that firms can
simultaneously pursue both competitive and collaborative actions (Luo et al., 2006;
Lado et al., 1997; Brandenburger and Nalebuff, 1996). Firms can compete in one sector,
for example in the retail market or the domestic market but can collaborate in another
market, for example the food service or export markets. Simultaneous competition and
co-operation is becoming an important strategy pursued by many large corporations
especially in the high technology and consumer electronics sectors (Cravens et al., 1993;
Barney, 1986, 1990). Thus, the debate is no longer centred on whether inter-firm
alliances are beneficial but rather on how to develop alliances that benefit all partners
(Logan, 2000; Menon et al., 1998).
Outsourcing alliance is a seller’s contractual arrangement with a vendor to provide
a number of closely linked functions as an agent of the seller (Fill and Visser, 2000;
Johnson and Schneider, 1995; Maltz, 1994; Lieb et al., 1993). Outsourcing alliances can
be cemented through simple informal word-of-mouth arrangements or through
contractually binding agreements (Min et al., 2005; Sporleder, 2006). Experiences with
diverse forms of arrangements reveal that the success of alliances is often determined
by how cohesively partners work together to achieve their objectives rather than by the
rigor of their contractual agreements.
Most outsourcing decisions are informed by resource based and transaction cost
economics theories of firms (Halldo´rsson and Skjøtt-Larsen, 2004; Bolumole, 2001;
Berglund et al., 1999; Dess et al., 1995; Jones and Hill, 1988). These theories assume that
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resources are heterogeneously distributed between firms and that these resources are
not readily transferable. Because of differences in resource endowments firms possess
unique core competencies and therefore differentiated competitive advantages (Logan,
2000; Dess et al., 1995). Beliefs regarding complementarities of the unique competencies
of supply chain partners often encourage firms to explore collaborative ventures.
Outsourcing alliances are predicated on partners’ desires to add-value and create
differentiated advantages, advantages that provide some level of uniqueness and
competitive strengths (Christopher and Towill, 2000; Mintzberg, 1994; Peters, 1990).
Increasing the value of propositions to customers helps engender customer satisfaction
and this could lead to greater customer loyalty and reduce the threat of customers
switching to competing suppliers (Rodriguez et al., 2006; Kurnia and Johnston, 2001;
Cox, 1999a). Customer value propositions are not only enhanced by providing physical
products that align with the quality, price and other product specific attributes but also
by increasing service quality (Bititci et al., 2004). Service quality is substantially
influenced by the architecture of the supply chain (Muller, 1991, 1993).
Firms tend to outsource functions that are not their core competency and consequently
believe that undertaking such services in-house will not add-value to customers
(Brannemo, 2006; Johnson and Schneider, 1995; Amaldoss et al., 2000). Outsourcing
enables firms to concentrate on functions at which they are best, simultaneously accessing
the capabilities and resources of other actors (Logan, 2000; Foster and Muller, 1990).
Specialist distributors often provide expertise and knowledge about customers that the
firm might not possess in-house or expertise and knowledge that is difficult or costly to
obtain from elsewhere (Sheehan, 1989). By sharing unique and scare resources and
capabilities, alliance partners are better positioned to increase customer value through
providing better quality and levels of service, generating greater productivity and
efficiency in the supply chain and creating enduring customer relationships (Min et al.,
2005; Cante et al., 2004; Smith et al., 1998; Probert, 1996; Shaw and Gibbs, 1995).
Cost saving is a major driver of outsourcing alliances. Cost savings can arise from
faster inventory turnover (Muller, 1991, 1993) and reducing capital investment in
facilities, equipment and human resources (Lacity et al., 1995; Sheffi, 1990). The rapid
development and adoption of advanced technology in all areas of business operation
including production, processing, information communication, logistics, warehousing,
transport and customer relationship management dictates continued and early
adoption of new technology in order to remain competitive in dynamic market
environments. Large capital investments are beyond the resource capabilities of most
businesses particularly SMEs. Outsourcing presents opportunities to share the cost of
investments with other supply chain actors. Firms specialising in providing transport,
warehousing, logistics and marketing services could potentially achieve greater
efficiencies through collaboration rather than by pursuing unilateral arrangements
with large numbers of suppliers and customers (Thron et al., 2006; Barratt, 2004;
Christopher and Towill, 2002).
Distribution outsourcing alliances enable suppliers to penetrate unfamiliar markets
by gaining better understanding of market needs and opportunities (Maltz and Ellram,
1997; Maltz, 1994; Bence, 1995). Where the distributor has greater market expertise;
customer service, including in-market sales activities, can be conducted more
efficiently by the distributor. Customer service is rapidly becoming a major outsourced
activity (Daugherty et al., 1996). Outsourcing to a firm that deals with many other firms
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often provides access to knowledge on performance within the industry and thus also
provides the opportunity to benchmark performance against other actors including
competitors. Outsourcing thus presents opportunities for alliance partners to engage in
joint learning and joint problem solving (Huber, 2004; Quinn, 1999; Kohli and Jaworski,
1990). Such joint initiatives provide knowledge exploitable in constantly improving
customer service, operating costs and market performance including new product
development initiatives (Lemke et al., 2003; Goffin et al., 2000; Monczka et al., 1995).
That new product introductions and early introduction of new products can provide
substantial competitive advantages is often overlooked. Review of extant studies on
new product development and constant quality improvement through supply chain
engagements reveal that past studies have focussed primarily on the high technology
and large business sector (Lemke et al., 2003; Goffin et al., 2000; Monczka et al., 1995).
There appear to be a significant gap in knowledge on supplier-reseller engagements in
new product development and introduction within the food SME sector.
The pursuit of greater integrity and cost savings in the supply chain has also
resulted in greater rationalisation with more and more firms forming alliances with
fewer, larger, technically efficient and innovative partners (Min et al., 2005; Christopher
and Towill, 2002). Using fewer alliance partners can achieve efficiency gains and
therefore greater commitment to the joint enterprise (Thron et al., 2006; Barratt, 2004).
For example, by using fewer distributors a processor can ensure greater volume
throughput for each of its distributors; this may mean greater commitment from
distributors which can generate better customer relationships and greater willingness
to share information. Limiting the number of alliance partners may therefore increase
the operational efficiency of the joint enterprise while simultaneously increasing the
satisfaction and commitment of alliance partners.
A major factor contributing to the success of outsourcing alliances is the willingness
of partners to adopt a common vision. The business must be conducted as a joint
enterprise with shared strategic vision and objectives (Brito, 2001; Fill and Visser,
2000; Reason, 1999). A common vision fosters joint learning and innovation, greater
efficiency in the use of interrelated resources; supports the efficient conduct of
interdependent activities; and increases the competency of all actors (Flore´n and Tell,
2004; Sadler-Smith et al., 2000; HaËškansson et al., 1999). In effect, partner relationships
must be based on commitment to increase the profits of all partners through adopting
strategies that align with each partner’s objectives and that of the joint enterprise
(Bititci et al., 2004; Cox, 1999b; Mattsson, 1989).
In order to achieve targeted outcomes partners must work together closely and
cohesively (Brunetto and Farr-Wharton, 2007; Golann, 2006). Managers must clearly
understand the dynamics of the social systems in the alliance and the ways in which
authority and control work within relationships (O’Regan and Ghobadian, 2002; Cox,
1999b; Arndt, 1983). Managers need skills in conflict management, team building and
relationship development (O’Regan and Ghobadian, 2002; Hailen et al., 1991). If the
relationship is adversarial, productivity and other gains are unlikely to be achieved
(Brunetto and Farr-Wharton, 2007; Spekman, 1988).
Past studies have identified several obstacles to establishing successful outsourcing
alliances. These include fear that outsourcing could lead to loss of control or that, as a
generalist, the distributor may not appreciate the complexities of handling the processor’s
products (Lynch et al., 1994; Bardi and Tracey, 1991; Maltz, 1994). Frequent failures with
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collaborative ventures and inherent problems in sharing resources and coordinating
strategies suggest that the structure and architecture of alliances need to be customised to
the strategic intent of the joint enterprise (Mikkola, 2008; Powell, 1990; Evan and Olk,
1990).
In the SME sector, there is an additional conundrum. SMEs display strong
entrepreneurial orientations, engaging in creative, unusual or novel solutions through trial
and error rather than adopting a systematic process of inquiry and strategic planning
(Stokes, 2000; Morris and Sexton, 1996). The responses of SMEs to business issues are
influenced not only by structural and managerial constraints but also by the SME’s culture
(Schindehutte et al., 2008; Wolff and Pett, 2006) which is often highly entrepreneurial.
Many of these barriers to outsourcing alliances can be attributed to relational factors.
The most profound causes of failures in outsourcing alliances are unrealistic performance
expectations, lack of commitment to shared goals, poor communications and a lack of trust
between the partners (Brunetto and Farr-Wharton, 2007; Logan, 2000; Lambert et al.,
1999). Trust, commitment and co-operation between alliance partners engender
satisfaction with the relationship and create enduring alliances (Flore´n and Tell, 2004;
Sadler-Smith et al., 2000; HaËškansson et al., 1999). Trust, commitment and co-operation are
often the outcome of clearly elucidating the strategic intent of the alliance, the alliance
being successful in achieving these strategic intents and the partners readily sharing
information that can be used to achieve the strategic intent of the joint enterprise (Brunetto
and Farr-Wharton, 2007; Geyskens et al., 1998). Several past studies recommend the
establishment of measurable and realistic goals and tracking performance against
these indicators so that alliance partners can constantly monitor the alliance’s tangible
outcomes (Rodriguez et al., 2006; Logan, 2000; Lambert et al., 1999).
Methodology
The case study is based on detailed analysis of the dyadic relationship of a SME food
processor and its exclusive national distributor to food service and independent grocery
retail customers. A single case study limits the potential to generalise the findings.
However, there is evidence that single case analysis using multiple techniques of inquiry
and data validation is rigorous enough to examine the dyadic relationships in new strategic
initiatives (Brannemo, 2006; Easton, 1998). Additionally, uniqueness such as the study
context, product-market life cycle stage and market growth strategies mean that a single
case is appropriate for this paper (Bhaskaran and Sukumaran, 2007). The research also
explores a contemporary phenomenon in its real life context; a situation in which a single
case is contended to be more informative than multiple cases (Rowley, 2002; Yin, 1994).
The information for the case study is based on a multi-method modes of inquiry
incorporating exploratory discussions with the marketing manager of Z, a literature
review, in-depth interviews with two senior managers in Z and Y using
semi-structured questions (based on prior theory informing the questions) and
unstructured probe questions, direct detailed observation of operations and activities
in Z and Y, and a review of documents such as company brochures, company accounts
and correspondence between Z and Y. In-depth interviews were conducted with the
marketing managers and chief executives of both Y and Z.
The inquiry combined inductive and deductive approaches, prior theory informing
the questions and new theory being inferred from probing the responses of the
participants (Perry, 1998). Prior theory based on knowledge gained through the process
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of interaction in the exploratory discussions informed the case study development and
critical review and deduction was the basis of the probe questions and observations
(Perry, 1998; Parkhe, 1993; Eisenhardt, 1991, 1989). The issues probed included Z’s core
competency, trends in Z’s market environment, motivations for targeting food service
and independent grocery retail customers, reasons for pursuing a distribution
outsourcing alliance rather than conducting this activity in-house, the criteria on
which Y was identified and selected, and satisfaction with the alliance. With the
managers of Y, we probed Y’s core competency, the motivations to introduce Z’s
product range, trends in Y’s market environment, the way in which Z was identified
and selected, and satisfaction with the alliance.
Because this is a single case study there are limitations to generalising the results
and thus theory building. To overcome this limitation we adopted the positivist and
embedded approach to establish analytic generalisation and thus support theory
building. Analytic generalisation attempts to gather evidence that supports the theory
without necessarily proving it definitively (Firestone, 1993). The positivist approach
offers greater scope to manage issues such as validity, reliability, structuring data
collection, analysis of data and generalisation and theory building (Rowley, 2002;
Riege, 2003). The results were triangulated by comparing the findings obtained from Z
with information obtained from Y and other sources such as archival records, field
observations and the findings in extant studies.
Case study: review and discussions
Company Z is a mid-sized seafood processor and marketer based in an Australian
regional town. It is a wholly owned subsidiary of a large Japanese corporation. The
parent company has seafood processing plants in South Vietnam, Thailand and Japan.
Z’s competency is in processing value-added Japanese style seafood products so as to
manufacture consumer products such as fish paste, seafood highlighter, seafood sticks,
formed calamari rings, formed squid rings, seafood bites, seafood balls, fish cake,
seafood parcels and crumbed fish fillets.
Z’s final customers are consumers of high value, ready-to-eat seafood products.
From Z’s first commencing its Australian operations in 1988, it reached its customers
through the major supermarket chains. Approximately, 85 per cent of Z’s current
sales are to the two large supermarket chains, Coles and Woolworths, the remaining
15 per cent of production is sold to a few wholesalers throughout Australia.
Z’s decision to focus on the major supermarket chains and a few wholesalers was
predicated by its strategy to build sales volume, optimise resource utilisation and
generate economies of scale in production and marketing. In order to control sales and
distribution costs Z only sells full pallet loads of products, an economic order size
determined on the basis of computing the cost of consolidating and servicing orders.
High transport and handling costs made it inefficient and unprofitable for Z to deliver
less than full pallet loads. Because Z has about 27 stock-keeping units, the
supermarkets are not saddled with high stock levels as individual stores, totalling
about 1,500 stores, are able to purchase mixed pallet loads and consequently minimum
order requirements do not constrain decisions to purchase. Supplying mixed carton
lots based on historical sales trends also enabled Z to maintain high service levels
while virtually eliminating losses from write-off of “out-of-date” or damaged stock.
Therefore, notwithstanding the market domination and potential coercive power of the
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supermarkets, this arrangement was an effective way of Z reaching consumers all over
Australia.
Y is a national distributor specialising in distributing to SMEs in the food service
and grocery retail sectors. Y has a national network of warehousing, distribution and
transport infrastructure, a large and experienced sales team with expertise in selling
high value foods, and a long history in the high-value food distribution business.
Y imports speciality frozen and chilled foods from more than 60 countries world-wide,
consolidates orders for a variety of products from its customers and then supplies these
orders within scheduled delivery lead times of about seven days. Because Y sells a
mixed consignment of products from different suppliers to each outlet, Y has the
capability to achieve transaction cost efficiencies even if individual stores only
purchase one or two cartons of each supplier’s products.
From about the 1990s, Australia experienced significant growth in disposable
incomes, unemployment decreased sharply, and many more Australian families became
double income families. These trends superimposed in an environment characterised by
increasing numbers of single households, attributable to an aging population and
greater number of people electing to remain single, meant that many more Australian
households were purchasing ready-to-cook meals. The changing demographic and food
consumption trends influenced Z’s sales and business performance. Z’s sales
progressively increased. From 1990 to 1998 Z recorded double digit growth with sales
of more than $15 million in 1998. During this high growth phase Z continually and
successfully expanded its product range. However, even during this peak sales phase Z
was only operating at near full capacity, on a one shift 8.5 hour production cycle. There
was therefore considerable scope to increase production and exploit economies of scale.
From 1998 to 2004 Z’s sales grew less rapidly and from 2005 sales progressively
declined This was because Z experienced intense competition from low-cost imports
from countries such as Vietnam and Thailand. Market liberalisation and reduced import
duties, the strengthening of the Australian dollar and the free flow of information
through the internet and therefore greater knowledge about sources of overseas supply
meant that competition from overseas suppliers became more intense. Importers became
more capable of efficiently servicing the two major supermarket chains. Customers were
also seeking out and trialling a greater variety of the ready-to-cook meals that were now
on offer in Australian supermarkets. Z saw these developments, not unique to Australia,
as potential threats to its business.
Research in the UK indicates that when market share for a product in the
supermarket segment reach 80 per cent (as is the case with Coles and Woolworths in
Australia) incremental sales are difficult to achieve (Fearne and Hughes, 1999).
According to Fearne and Hughes independently owned retail stores are better
positioned to service the remaining 20 per cent of the market because they can
customise services to the needs of this segment. This also appears to be the case in the
Australian grocery retail market. Because of factors such as personalised and
customised service and accessibility, about 15-20 per cent of retail sales for most foods
are still conducted through independently owned neighbourhood stores.
Notwithstanding the fact that Z’s new market development initiatives were not
informed by evidence in other countries, the strategies seem logical and timely.
However, Z experienced unexpected difficulties in penetrating the food service and
independent grocery retail markets. Under its present marketing model, Z sold full
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pallet loads to more than 1,500 stores belonging to the supermarket chains. The two
supermarket chains accounted for about 90 per cent of the retail market for
ready-to-cook foods. In contrast, most independent retail grocery stores and food
service outlets could only purchase a few cartons per transaction. Thus, customers in
these sectors did not have sufficient purchasing capacity for Z to service them directly.
If Z attempted to penetrate this market directly it would have needed to make
substantial investments in a network of regional warehouses, transport and
logistics infrastructure and sales personnel. Because warehousing, transport and
logistics infrastructure are expensive and because Z did not have sufficient knowledge
of this market, it was unlikely that Z could add value through conducting these
functions in-house. Z could not outsource these services from different providers across
Australia as it did not have the management and resource capabilities to handle
several service providers. Z recognised that by outsourcing these functions to
one vendor, it could access the vendor’s resources and competency and therefore add
value through offering efficient customer service at competitive prices.
Z also recognised that the market insights and relationships of a specialist distributor
could enable better understanding of the individualised demands of a wide variety (arising
from factors such as size, business culture and whether part of a franchise or voluntary
group) of new customers. Accurate and timely information about markets supports
efficient planning and management of production, inventory, promotions and
merchandising and this could potentially help Z achieve its objectives more efficiently.
A strong relationship between Z and a sole distributor could lower operating costs, lower
costs of replenishing stocks, create efficiencies in warehouse space utilisation, reduce
inventory levels, reduce handling and management of damaged and out-of-date stocks,
and increase efficiency in the use of transport facilities. These benefits are not unique to
this alliance and have been amply documented in the findings of several past studies
(Logan, 2000; Lambert et al., 1999; Lieb et al., 1993; Mattsson, 1989). Because Z has less
experience and competency than Y in marketing to food service and independent grocery
retail customers it seems logical that Z should outsource distribution functions to Y.
Because there is substantial alignment between the competencies and resources of Z
and Y this alliance seems a logical development. Y’s experience, knowledge,
warehousing and distribution network means that Z could sell even single carton lots
to its customers, something beyond Z’s resource capabilities and competencies. Y’s
existing strong customer base presented substantial opportunities for Z to increase its
portfolio of customers. Because of low volumes per order and resulting diseconomies, Z
could not efficiently meet the needs of SMEs in the food service and independent
grocery retail market through merely investing in infrastructure and facilities. Z’s
management team concluded that Z could piggyback on Y’s resource capabilities and
competencies to access food service and independent grocery stores throughout
Australia, markets that Z was could not cost efficiently service. The alliance with Y
was therefore a logical strategy. It provided Z the opportunity to develop new markets
and reduce Z’s dependence on the maturing supermarket segment while
simultaneously providing Y with the opportunity to increase sales per transaction
and therefore achieve transaction cost economies.
Notwithstanding the synergies in competencies and resource endowments, the
alliance between Y and Z was a chanced outcome and was not the outcome of
systematic and in-depth research and analysis of complementarities in the competency
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and culture of the two firms. In our opinion, a systematic evaluation of the
complementarities and business culture of Y and Z and the development of a joint
vision based on this knowledge would have resulted in a more effective alliance.
However, as evident in a large number of studies, trial and error strategic initiatives
and even opportunistic decision making are the reality in the SME sector particularly
amongst low technology food processing and marketing enterprises. The response of
Z and Y to business issues such as developing new markets, diversifying into new
markets, accessing new sources of supply, the supply chain architecture that they
developed and decisions to adopt an experimental alliance seems atypical of SMEs
(Schindehutte et al., 2008; Wolff and Pett, 2006; Golann, 2006; Bhaskaran, 2006;
Cante et al., 2004; Bence, 1995).
In 2003, Y contacted Z to ask whether it could distribute its products. Because of
increasing operating costs Y was expanding its product portfolio in order to increase
sales per transaction and increase scale economies and operating efficiencies. Y had
assessed Z’s product range to be a good fit to its current product range. Y believed that
Z’s products and brands enjoyed a premium positioning in major supermarkets. Y was
also aware that Z, experiencing declining sales, had rationalised its marketing
operations in 2002 through centralising these functions; an obvious opportunity.
Z had discontinued the positions of state-level sales managers in Victoria, Queensland,
New South Wales and South Australia. This rationalisation left Z with an Australian
marketing team comprising the national sales manager and the business development
manager. Coles and Woolworths had more than 400 stores in each state, more than
1,500 stores Australia-wide. Therefore, the state-level sales managers were critically
important to Z’s marketing initiatives. Rationalisation of the marketing operations
meant that the two-person marketing team now had to liaise with the head offices of
the two supermarket chains and with key customer personnel in more than 1,500 stores
throughout Australia. Z then began to experience difficulties in managing sales and
marketing initiatives in the supermarkets and this started to adversely affect its sales.
The decision to rationalise the marketing operations and thus reduce services to the
supermarkets demonstrates Z’s belief that growth opportunities in this segment had
matured.
The reduction in marketing resources meant that Z was not able to pursue market
development unaided. Z did not have the expertise or resource capabilities to service
efficiently the needs of the highly fragmented independent grocery retail and food
service customers. Unlike Coles and Woolworths which use a centralised buying
system, purchasing decisions in independent grocery retail and food service outlets are
made by the manager’s on each outlet. Y had been supplying small-scale food service
and grocery retailers for more than 50 years. Partly because of this long history, Z
believed that Y had competencies relevant to dealing with numerous small-scale food
service and independent grocery retail stores. Z believed that Y’s business model,
market knowledge, customer relationships and structural capabilities were critical to
its sales development strategy in this sector. Z’s management team believed that the
appointment of Y as a sole distributor could lower distribution costs because of
savings in costs of replenishing stocks, optimised warehouse space utilisation, reduced
inventory levels, and reduced costs of handling damaged goods and returns. The
decision to enter into a distribution outsourcing alliance with one partner therefore
seems logical as it could potentially help Z overcome its resource constraints and
Firm-distributor
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generate transaction cost efficiencies. This position is supported by findings in many
studies that alliances with fewer, larger, technically efficient and innovative partners
are more effective than alliances with a multitude of partners (Min et al., 2005; Fearne
and Hughes, 1999).
The alliance experienced major challenges. It was founded on assumptions about
each partner’s benefits. Y anticipated efficiency gains through greater utilisation of its
existing warehousing, transport, logistics and human resources. Y could only achieve
operating efficiencies through increasing total sales, sale of products sourced from all
its suppliers. There was no reason for Y to increase the sales of products from any one
supplier. Greater commitment to Z’s products could only result from establishing a
preferred supplier relationship with Z was and this may be detrimental to Y’s
relationship with its other suppliers. A special relationship can be fostered through
developing a common vision whereby supply chain partners pursue their activities as a
joint enterprise (Flore´n and Tell, 2004; Sadler-Smith et al., 2000; Ha˚kansson et al., 1999).
The challenge is to identify the unique opportunities in the relationship between
Z and Y, not merely, as is the case with most supplier-reseller relationships, targeting
benefits that accrue from resource sharing and cost efficiencies.
Y and Z did not explore how their independent strategic objectives could be
achieved through widening the scope of this engagement from that of a seller-reseller
mode of engagement to a joint enterprise model. In order to do this, the partners would
need to develop a business model that is different to what exists between Y and its
other suppliers. Our discussions and observation of business practices suggest that the
foci of Y and Z were only on issues pertaining to resource utilisation and cost
efficiencies. The partners did not investigate the systems, structures and incentives
that are needed to develop business, satisfy and retain customers, develop their
competitive strengths and establish a sustainable long-term alliance.
Y agreed to enter into the alliance on a phased basis (state-by-state). The partners did
not discuss how customers with branches in different states will be serviced in the
interim. Z agreed to provide Y a 15 per cent discount on the sales price to offset sales and
distribution expenses. The senior managers of Y and Z agreed to meet at three monthly
intervals to review performance against targets and continually work on sales growth.
The partners did not explore how to develop and retain new customers. The alliance was
predicated by the belief that sales growth will be rapid because Y already had a large
customer base and the alliance primarily entailed the introduction of a range of new
products to Y’s existing customers. Y had recently established a distribution alliance
with another supplier of chilled meat products. Within six months of finalising that
arrangement, the supplier’s sales had increased by about 40 per cent. Based on this
evidence, Y and Z assumed that the same business model can be replicated.
However, in the past one and a half years Z only achieved about 5 per cent growth in
sales through its engagement with Y. Even though sales growth was substantially less
than what was forecast, cost of sales (discounts offered to Y, administering the sales,
providing samples and other promotional support) was much greater than what was
forecast. Z and Y did not carefully analyse whether their expense and sales were
realistic and what, if any, could be the implications of these targets not being achieved.
Past studies reveal that unrealistic expectations and poor communication between
partners tend to adversely affect trust and commitment to an alliance and account for
the failure of many alliances (Rodriguez et al., 2006; Logan, 2000; Lambert et al., 1999).
JMTM
20,6
844
The senior managers of both Y and Z acknowledge that their discussions and
negotiations should have been more far reaching and underpinned by a joint enterprise
philosophy rather than focussing on sales development and cost savings. The
relationship formation and strategies that Y and Z adopted are atypical of the nature and
process of engagements in the SME sector, entrepreneurial and trial and error
experimentations (Schindehutte et al., 2008; Wolff and Pett, 2006; Stokes, 2000; Morris
and Sexton, 1996). Because Y and Z focused on achieving their short-term goals and
entered into this alliance to overcome a compelling immediate problem, Z to arrest
declining sales and Y to increase capacity utilisation and thus reduce operating
expenses, the alliance did not focus on customer value creation. Disappointing sales and
cost of sales results have created uncertainties regarding the benefit of the relationship.
This appears to have diminished the partners’ trust and commitment to the venture.
The achievements within a few months of establishing the alliance reveals the scope
and potential of this alliance. Y became a conduit for good quality market intelligence
and speedy information on new product development opportunities. Within one year of
establishing the alliance Z successfully introduced three new products to food service
outlets, products developed by Z based on market intelligence provided by Y. The
importance of supplier-reseller relationships in new product design and constant
quality improvement is discussed in some studies focussing on the high technology
and large business context (Lemke et al., 2003; Goffin et al., 2000; Monczka et al., 1995).
Our review of extant studies suggests that knowledge sharing with the objective of
creating customer value through new product development is not a priority in SME
supply-chain engagements. This seems to be a unique capability that cannot be
achieved by Z and Y working independently and therefore is a significantly important
contribution of the alliance.
The findings in this paper reveal the importance of incorporating new product
development opportunities as a performance indicator in SME supply chain engagements.
The speed to market (the time between idea generation and commercialisation) was high
when benchmarked against projects such as the UK Heritage beef project. The UK
Heritage beef project took more than one and a half years from idea generation to product
launch (Shaw and Gibbs, 1995). In the food marketing industry, profit margins are low and
returns from new product introductions are dependent on first mover advantages, an
advantage which often dissipates quickly because low barriers to entry encourage
competitors to introduce “me too” products (Bhaskaran, 2006; Fearne and Hughes, 1999).
Constant innovation and rapid commercialisation is a critically important strategic
capability in the food SME sector. In our opinion, the capacity to quickly disseminate
market information and develop new products that match market needs is the unique
competitive advantage of this alliance. Prior to this alliance Z experienced barriers in
developing and introducing new products. New product introduction to supermarkets,
Z’s core market, was a slow and demanding process. The supermarkets practice
stringent procedures for evaluating new product proposals. New product are considered
on their strength to generate additional sales and profits in the product category,
refrigerated display space availability in stores and whether the new product could
potentially cannibalise the sales of existing products. Contrastingly, food service outlets
targeted by Y were constantly adopting novel products to interest their customers.
Introducing new products to SMEs presented Z with the opportunity to pilot new
products and then scale-up production of the successes and introduce these products to
Firm-distributor
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alliance
845
the independent grocery retail sector and potentially even to the supermarket chains.
The alliance also presented Z the opportunity to manufacture under contract some
products for Y which Y then marketed as its “private” labels to independent grocery
retailers.
Therefore, within one year, the alliance was revealing a new and potentially
profitable dimension. However, the alliance had not achieved targeted sales and profits
and this unfortunately adversely affected the trust, commitment and relationship
between the partners. The critical weakness of this alliance was the non-adoption of a
common vision and the failure to develop a joint enterprise philosophy based on
synergies that extended beyond immediate resource utilisation and cost efficiency
imperatives. While more efficient use of resources and cost savings are important, the
capacity of the partners to work together and speedily introduce differentiated
offerings is perhaps the unique capability of this alliance.
Findings and conclusions
The outsourcing alliance between Z and Y was predicated on beliefs regarding the unique
and non-transferable competencies of the partners. Z had competency in producing high
value Japanese-style seafood consumer goods. Y had competency in providing
warehousing, transport, logistics and personal selling functions to customers that can
purchase only small lots per transaction. Therefore, the alliance was driven by perceived
mutual benefits. Z decided to outsource distribution services to new target markets to Y
because it concluded that it did not have the knowledge, resource endowments, transaction
cost efficiencies and customer relationships to add value to offerings targeted at customers
in this new market. By outsourcing the distribution function, Z was implicitly making
decisions on the ownership and control of particular resources so as to appropriate the
maximum share of value through greater value-add to customers. The motivations for the
outsourcing alliances between Z and Y, discussed above, are consistent with past studies’
findings (Min et al., 2005; Kurnia and Johnston, 2001; Karonis, 1997).
This engagement between Y and Z reveals many issues that may affect the success
of distribution outsourcing alliances, particularly such engagements by SMEs
operating in a low technology and highly competitive environment. SMEs tend to
adopt a non-systematic and trial and error mode of decision making. Thus, unlike large
companies alliances between SMEs tend to be opportunistic and are targeted to
overcome immediate problems.
The alliance between Y and Z reveal many features that characterise business
development strategies by SMEs. Z’s motivation for the alliance was the downturn in
its existing markets, the imperative to develop new markets and its excess production
capacity. Y’s motivation was to increase sales and thus increase the utilisation of its
warehousing, transport, logistics and human resources and thus achieve scale
economies. Because of this pre-eminent focus on increasing resource utilisation and
achieving scale economies, the partners did not explore how the alliance could generate
customer value creation, increase customer satisfaction and loyalty, and build a
successful and sustainable joint enterprise. Additionally, the partners established
unrealistic sales and expense targets. Lack of success in achieving these targets
diminished the partners’ trust and commitment to the alliance. The alliance does not
seem to have much potential and appears to be unsustainable.
JMTM
20,6
846
In our opinion the partners need to revisit the basis on which this relationship was
founded. Z and Y should develop a common vision and create a business architecture
that would enable them to strengthen their position in the market through creating
value for their customers. Because of low barriers to market entry and low profit
margins, differentiation through constant innovation and speed-to-market is critically
important in marketing food products. The outsourcing alliance between Z and Y
revealed significant capability in constant innovation and speed-to-market. Y’s
competency in rapidly identifying market needs and Z’s competency in rapidly
developing novel products to satisfy these needs are unique capabilities. Within
one-and-a-half years of starting-up, the alliance successfully introduced three new
products to food service customers. This is a significant achievement when
benchmarked against successful new product introductions by other food supply chain
alliances. Concurrently, Y also identified opportunities for Z to contract manufacturing
private label products for independent grocery retail stores. These are new business
opportunities, opportunities that Z had not previously identified.
In order to capture these opportunities fully, the alliance has to adopt a common
vision and mission. This would entail substantial re-engineering of the business
philosophy, culture and systems by both Z and Y. Z and Y would have to adopt a
business model based on shared values. This could have implications on Y’s
relationships with other suppliers as it may have to model its relationship with Z
differently to that with other suppliers. These initiatives would also call for systematic
research, evaluation and development of business architecture and protocols. Past
studies on SMEs suggest that introducing such changes could be a major challenge.
SMEs tend to adopt an entrepreneurial approach to business development and may
therefore not have appropriate skills in conflict management, team building and
relationship development; critical skills in pursuing an alliance with a common vision
and mission.
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About the authors
Suku Bhaskaran is the Director of the Food Marketing Research Unit, a research, consultancy
and training services centre in Victoria University, Australia. He is an Associate Professor, has a
successful track record in tendering for and completing nationally competitive research grants
and contract research projects for food companies. He is published widely in refereed journals
such as the Journal of Small Business Management, Cross Cultural Management – An
International Journal, Journal of Consumer Marketing, Marketing Intelligence & Planning, and
The British Food Journal. Suku Bhaskaran is the corresponding author and can be contacted at:
[email protected]
Helen Jenkins was the Business Development Manager of Austrimi Foods. She is currently
the Executive Officer of the Australian Prawn Farmers Association.
JMTM
20,6
852
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