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
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
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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,
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).