Review on value chain analysis in interfirm relationships: a field study

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Review on Value chain analysis in interfirm relationships: a field study

This paper examines the use of the value chain analysis (VCA) in interfirm relationships (Shank, 1989; Shank and Govindarajan, 1992, 1993) by a large UK retail firm J. Sainsbury to optimize the supply chain management (SCM) with its suppliers. The case company has developed an activity-based costing (ABC) model of supply chain to support this practice. However, there are some important theoretical issues emerging from the case study relate to the coordination of supply chain activities and therefore the author provides some directions for further research.

Since realizing the importance of management within and between organizations, the issues towards the interfirm relationships are inducing increasing research interest. According to the literature (Porter, 1985; Shank, 1989; Shank and Govindarajan, 1992, 1993 etc), VCA is a useful tool to help companies to gain competitive advantage by analyzing, coordinating and optimizing linkages between activities in the value chain. However, little evidence of the use of VCA in practice has become a reason for criticism on the relevance of the concept for practice (Lord, 1996) which said that the linkages between value-added activities maybe within or between the firm and its suppliers, competitors and customers, not just from an intrafirm perspective. Therefore, author decided to take advantage of the use of ABC model for SCM practices in Sainsbury to examine VCA in the real life. On the basis of the available information about interfirm relationships, supply chain management and ABC, author designed a research to collect data from three different directions as: company information, supply chain management and the cost model used for VCA.

Firstly, for the company information about the suppliers, an important source of information could be obtained through the interviews by the Logistic project manager in Sainsbury. However, it also could be achieved from other related sources, such as annual reports. Secondly, for the supply chain management, this practice was mainly performed by the Sainsbury's Department of Logistics which classified three types of suppliers based on the volume they delivered and their degree of importance to Sainsbury as core suppliers, middle-large suppliers and small suppliers of six different networks. For the core suppliers which have a major impact on the supply chain, Sainsbury launched a platform called Supply chain Development Group (SCDG) to let them come together to exchange information about the supply chain improvement projects by using the Sainsbury Information Direct (SID). As to the middle-large suppliers which only have little impact on the improvement, however, they could use cross-docking which implies that supplies do not need to deliver products to each regional distribution centre (RDC) but only to a primary consolidation centre (PCC) and then Sainsbury transports them to the RDCs, to gain efficiency and reduce costs for both parties. While for the small suppliers which only deliver little number of products and again have little impact on the costs and performance in the supply chain, Sainsbury developed an internet-based ‘web-EDI' to replace the old normal one for information exchange.

Nevertheless, it was insufficient to gain the benefits only by the cooperation with suppliers. Author argued that it should also be required to make a contribution to competitors by telling them what they are doing or going to do in order to avoid some unnecessary expenses.

Until 1996, there was only a limited insight of the costs of supply chain in Sainsbury. In order to adapt the changes in the supply chain in which previously adversarial relationships with suppliers substituted by cooperation, Sainsbury's Department of Logistics developed an ABC model of supply chain which includes supply, distribution and retail to analyze and optimize the costs of activities within the interfirm relationships. The main user of the supply chain cost information—Sainsbury's Logistics Operations department used the cost information of activities collected from itself and suppliers to identify opportunities for cost reduction by making three types of analyses which are benchmark analyses, strategic what-if analyses and trend analyses. The following example presented in this case study clearly demonstrates the use of this model. Since Sainsbury could not persuade the large supplier to adopt plastic crates for chilled products so decided to apply this model to calculate the costs of using and not using it so as to show what changes would occur in the supply chain activities if adopting. Thus it was easier to show the benefits of using the crates to supplier. However, the benefits of increased efficiency were not equal for both parties which would be achieved mainly by Sainsbury and the allocation problem need to be resolved in negotiations by either Sainsbury would make the investment for the supplier or supplier's price would be agreed to increased.

In the above example, the two control problems described by Gulati and Singh (1998) as the coordination problems and the management of appropriation concerns were clearly demonstrated and reflected by three important issues. First, it is about the need to use of VCA. Lord (1996) argued that there was no need to perform VCA to gain the benefits from the linkages and said that it can be obtained automatically by the cooperation with the suppliers. While in this case, it demonstrates that VCA could provide a clear understanding of supply chain performance and changes of the costs of activities in the supply chain operations for the purpose of discovering opportunities to gain advantages in a competitive market. Second, it relates to the exchange of cost information. Although providing cost information to a buyer has a negative impact on a supplier, this information still can be used in a cooperative way by the commitments made between Sainsbury and the suppliers. Third, as to the appropriation concerns which seems to be solved in this case study by the negotiation with both parties, however, Tomkins (2001) argued that there was a need to employ accounting techniques into the negotiation when the conditions became more complex as in this case study. 

Although this case study was only characterized by a limited range of activities in the value chain, it did deal with the argument proposed by Hergert and Morris (1989) on traditional accounting systems for supporting a VCA which should be focused on activities, reflected the economics of performing those activities by integrating data of cost drivers and accounted for the interdependence between activities across firms. At the end of this paper, author provided four directions for doing further research as: whether the benefits of VCA in interfirm relationships can be used for internal purposes; the problems and solutions of the VCA implementation; the use of VCA in wider scope and how the SDI used to coordinate the supply chain management.

In conclusion, as this case study reflected both control problems in interfirm relationships, organizational theory and transaction cost economics were useful to provide an explanation of the case observations. However, it will only occur when the parties within the interfirm relationships are confident about each other's intention because of the risk of refusing the information. Therefore, this condition restricts the benefits to be obtained when the interfirm relationship is adversarial and therefore cooperation becomes the basis of exploitation of the linkages between value added activities. Otherwise, both parties may make a loss.