Identifying Interfirm Total Cost Advantages for Supply Chain Competitivenes

Supply chains, partnerships, and strategic alliances are popular interfirm linkages designed to attain joint cost savings, product enhancements, and competitive services. Much research exists showing the operating advantages and the nature of these links between firms. Though cost and productivity differences between firms provide opportunities for these relationships, this article shows that key financial factors also support the rationale for them. These factors can be used effectively as extensions of current purchasing analyses of suppliers when considering potential partner relationships, or when simply conducting homework prior to negotiations. INTRODUCTION The supply chain concept opens new dimensions to interfirm relationships. Found in a variety of settings and with different motives and objectives, many firms developed supply chains during the 1980s as a way of seeking enhanced competitiveness through cost containment, product value, channel efficiency, compressed development of product launch times, or customer responsiveness. Few industries in the world have not utilized some form of this management approach. Supply chains, partnerships, strategic alliances, and other terms are used to portray a cooperative link in the buying-selling interface, all the way from the daily transaction to long-term research and product offerings.[1] Many have been in existence for a long time. American examples are Kraft and Pillsbury for refrigerated product distribution.[2] Corning has more than twenty joint ventures with other firms in many product lines.[3] A long standing joint venture has existed between DuPont and Burlington Industries in textile fibers and technologies.[4] More recently, Merck joined with Johnson & Johnson to combine the research and manufacturing advantages of one firm with the distribution and marketing strengths of the other.[5] These relationships take different forms and are designed for various purposes, and these are cited in the literature. This article treats them all as collective efforts by firms to cooperate in ways that are closer than traditional arms-length relationships. Purchasing can be a significant player in supply chain development and management. On a traditional level, many purchasing supplier rationalization programs of the early 1980s were based on consolidation of buying power for price and cost advantages. Many of these relationships led to mutual interfirm total cost savings. On a much higher level, purchasing can provide added value through more than cost savings as is evidenced by the supply chain and commodity concept as applied at Caterpillar Corporation.[6] In this setting, purchasing serves on a company/supplier/ customer team to improve product efficiency and effectiveness. In this role it is also the evaluator, creator, and manager of interfirm supply links. The intent of this article is to present six key cost factors that are central to most successful chains in use today. Two are traditional evaluative factors that have been used by purchasing to source and select suppliers for many decades. Four additional factors can be used that both enhance the theory of supply chain relationships and provide additional managerial insights into evaluating, implementing, and maintaining them. These four have generally not been a part of the purchasing supplier relationship evaluation, but they are financial factors that are central to an effective interfirm cost-savings effort. They were cited in this research by many upper managements as major elements in top level interfirm cooperative relationships. THRUST OF THIS ARTICLE This article is based on visits and interviews with purchasing managers and key management personnel in production, logistics, finance, sales and marketing, and planning in 241 firms and organizations between 1987 and 1990. The interviewed firms were based in the United States, Canada, Mexico, Latin America, Western Europe, Eastern Bloc, Asia, and Africa. …