SRM Series: #11 The Use of Power in Supply Markets

In this third in a series of blogs from Chris Lonsdale on the concept of power in buyer-supplier relationships, he asserts that a dominant power position in a business relationship is just that, a position. It doesn’t have to be aggressively exploited. In practice the deployment of power resources is a sometimes subtle and nuanced exercise. Over to Chris….

In the previous post in this series, I looked at the concept of buyer-supplier power, providing a high-level picture of what causes different power positions between buyers and suppliers. I also suggested that buyers can miss opportunities, through poor internal practices, to establish favourable power positions. In this post, we look at the use of power.

As was mentioned in the first post, the concept of power should not be seen as synonymous with an aggressive use of power. An understanding of the concept simply enables managers to understand their power position vis-à-vis a supplier and can be part of an overall commercial analysis. Once the power position is understood (and, admittedly, that is not always a straightforward task, not least as conditioning will often be employed by one or both parties), that understanding can assist managers in a number of different ways. We look briefly at two of those ways.

First, it can help to inform supplier selection decisions. There is a difference between a supplier’s ability to provide value for money and its inclination to do so. Very dominant suppliers often disappoint and in some situations buying organisations, having assessed the power positions of themselves and a number of suppliers, might consider selecting currently less capable suppliers that are likely to be keener to deliver and develop over time.

Second, power analysis can provide insights into what supplier management strategies might be possible with suppliers in different power positions. We can touch on a few of these insights. The power position of independence is broadly analogous to the economic condition of ‘perfect competition’ and should (assuming competent buying behaviour) lead to the buyer obtaining good value for money, with the assistance of e-auctions in the case of certain goods and services. However, it is the other three positions that the remainder of the post considers.

The power position of interdependence, where both parties regard each other as critical to their business, has long been associated with buyer-supplier co-operation and, indeed, such a position does often support co-operation or ‘partnering’.

I recently visited a large engineering company and looked at its co-operative relationship with a specialist raw materials supplier. When the ‘scarcity’ and ‘utility’ resources (see previous post) on both sides were analysed they came out pretty well balanced. For example, from the buyer’s point of view, the supplier offered proprietary products that it valued, the medium-term agreement offered a desired degree of price stability and the supplier’s reliability and service quality was one of the best in the supply market.

The supplier, on the other hand, also valued the medium-term commitment in what was a volatile market, the account was one of its biggest and it also valued what it considered to be a prestige customer account. This was clearly a relationship with a high level of interdependence.

The co-operation, underpinned by this interdependence, manifested itself in a high level of information exchange and on-going product and process development aimed at both cost-out and product and process enhancement. And, as the relationship delivered for both parties, the contract largely stayed in the drawer.

This is a very familiar tale, of course. However, is this the only power position that can support such buyer-supplier co-operation? Not in my experience. I have seen many fruitful co-operative buyer-supplier relationships when the power position favours the buyer. One concerned the telecoms arm of a large technology conglomerate. In the case of one of its products, a piece of telecoms testing equipment, it wanted a supplier to assemble all of the ‘non-core’ components and sub-assemblies.

It was offering considerable and regular business, a big brand name and on-going business assistance to a crowded market of relatively small players that found it very hard to differentiate themselves. It also ensured it kept the switching costs low to make sure the dominance didn’t slip away over time. However, while it certainly drove a hard bargain (harder than it could have done in a position of interdependence), it also recognised the impact of supplier quality on its own performance and the need to work with the supplier on continuous improvement. As a result, there was close co-operation, similar in operational terms to the engineering case.

For the reason discussed in the first post, this type of relationship, as well as the engineering one, can be thought of as ‘win-win’: the supplier, while the junior partner, both accepts that status and recognises that the relationship is a fantastic commercial opportunity for it in an unforgiving market.

Finally, buyers should, not surprisingly and if possible, try to avoid very dominant suppliers, in general, but especially where co-operative relationships with suppliers are sought. Work I did in the aerospace sector in the 2000s included many long-term relationships with dominant suppliers that were long, drawn-out struggles, with regular re-launches and personnel changes. Likewise, in the public sector, the UK government has often been criticised for its supplier selection in the IT market and many relationships between NHS commissioners and acute trusts in England are very similar to those I witnessed in the aerospace sector.

To conclude, the above discussion emphasises that a dominant power position is just that, a position. It doesn’t have to be aggressively exploited. The fair trade movement, for example, although by no means perfect, promotes the idea of trade where dominant power positions are not exploited for ethical reasons. But, as we have seen with the telecoms example, enlightened self-interest can see dominant power positions utilised carefully and responsibly as well.

This brings us back to horse meat. Aggressive use of dominance may well be part of the picture in this scandal. In many retail supply relationships the suppliers are very disposable, while the leading four retailers account for about 80% of the buy-side. This, according to many observers of the industry, although not really backed up by frequent regulatory enquiries, has led to brutal buying practices, with desperate suppliers all down the chain adopting desperate measures, measures that in the case of horse meat are now affecting almost everyone in that chain.

It has also led many observers of supply chains generally to draw broader lessons about procurement and supply management practice. A lot of people are feeling vindicated for very different reasons. In a final post on power, we look at some of those reasons and ponder what it might mean for procurement education and training.

By Chris Lonsdale

Guest blogger Chris Londale is a Reader in Procurement and Supply Management at Birmingham Business School’s Centre for Business Strategy and Procurement. See CBSP_brochure for details of the Centre’s research and renowned MBA programme.

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