Research " COMTETING UPSTREAM: INBOUND LOGISTICS AS A SOURCE OF COMPETITIVE ADVANCE " potx

Recognizing that early movers within competitive industries may be able to seize a disproportionate share of bargaining power over suppliers, this dissertation sought answers to the ques

COMPETING UPSTREAM: INBOUND LOGISTICS AS A SOURCE OF

COMPETITIVE ADVANTAGE

by Steven A Samaras

Copyright 2000 by

Samaras, Steven Andrew

All rights reserved

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COMPETING UPSTREAM: INBOUND LOGISTICS AS_A

SOURCE OF COMPETITIVE ADVANTAGE

A SOURCE OF COMPETITIVE ADVANTAGE

Steven A Samaras, Ph.D

University of Nebraska, 2000

Advisor: Lester A Digman

This dissertation explores a new competitive arena which shifts focus from

competition for customers, where advantages are becoming harder to find and sustain,

towards competitive advantage through control of inbound logistics Supply chain

management, industrial/organizational economics, transaction cost economics, and the

resource-based view support how inbound logistics activities may relate to cost

advantages, access to demanded quantities of limited inputs, quicker delivery of inputs,

and customized presentations of inputs These advantages can support the competitive

strategies and supplement downstream competitive actions employed by firms This study

investigates the utilization of this alternative perspective on competition

Recognizing that early movers within competitive industries may be able to seize a disproportionate share of bargaining power over suppliers, this dissertation sought

answers to the question Can and do firms utilize control of inbound logistics activities as

a source of competitive advantage?

Results of an analysis of 80 responses to a questionnaire suggest that control of inbound logistics represents a small but statistically significant portion of firms’ efforts toward the achievement of competitive advantages Sixty-five of eighty respondents

Cost, speed of delivery, and customization advantages were significantly related to

inbound logistics activities; access to supply and choice of strategy were not Effect sizes, although small, reflect an emergent form of competition which may have great future

potential Over 11% of the variation in cost advantages was related to control of inbound

logistics, as was 4.42% with speed and 4.81% with customization advantages

The study supports that some firms are effectively using inbound logistics as a source of competitive advantage This study also supports calls for the involvement of operational units in the planning stages of the strategic management process; rather than being considered only as an implementation issue

Key Words: Inbound Logistics; Competitive Advantage; Supply Chain Management

The author would like to acknowledge the support and contributions of several

individuals to the research and writing of this dissertation: Dr Lester A Digman, my

dissertation committee chair, whose mentoring made this effort possible, and whose

guidance helped to keep this effort focused; Professor Terrence C Sebora, whose

participation, comments and suggestions were essential to my confidence in the final product; and Professors Douglas R May and David I Rosenbaum whose suggestions and

comments were of great value in the research and writing of this dissertation

The author would also like to acknowledge the support of many colleagues,

especially Richard Gilson, Kevin Pauli, Chanhoo Song, and Shanguen Rhee, for their

unwavering support and; as well as the faculty and staff of the Department of

Management, especially Dr Sang M Lee, Linda Rohn, and Cathy Watson

The author would especially like to thank Annette and Hillary Samaras, who

sacrificed so much, that I could arrive at this point

CHAPTER ONE: Introduction

Introduction of Research Goal; Statement of Purpose

Introduction of the Theoretical Perspectives

Terminology: Supply Chain, Demand Chain,

Value Chain & Inbound Logistics

Power and Control

Competitive Advantage Derived Through Inbound Logistics

Research Question

Cost Advantage

Differentiation Advantage The Research Model

Importance & Anticipated Contribution

CHAPTER TWO: A Review of Relevant Literature & Development

of Hypotheses

Supply Chain Management and Inbound Logistics

Supply Chain Management Related to Strategy

Supply Chain Management Background and Definitions

Inbound Logistics Activities

Control of Inbound Logistics

Power Between Suppliers and Buyers

Transaction Cost Economics

Resource-Based View

Theory and Hypotheses Development

Inbound Logistics, Power, and Competitive Advantage

Power and Cost of Material Inputs

Definition of Variables by Hypothesis

First Set of Alternative Hypotheses

Second Set of Alternative Hypotheses

Control Variables Third Set of Alternative Hypotheses

Control Variables Fourth Set of Alternative Hypotheses

Control Variables

Method of Analysis

CHAPTER FOUR: Results and Findings

Descriptive Statistics & Correlation Matrix Control of Inbound Logistics Activities & Cost Advantage Control of Inbound Logistics Activities & Access Advantage Control of Inbound Logistics Activities & Timing Advantage Control of Inbound Logistics Activities & Customization

Advantage

Subsequent Analysis

Exploratory Factor Analysis of Inbound

Logistics Activities Correlation Analysis

Cost Advantage

Access to Quantity Advantage

Faster/Earlier Delivery Advantage Customized Arrival Advantage

Comparison of Results by Generic Strategy

CHAPTER FIVE: Discussion of Findings, Limitations of this Study,

and Implications for Future Research

References

Questionnaire

The Questionnaire in Retrospect

Implications for Practice Implications for Theory Limitations of this Study

First Time Instrument / Construct Validity

Future Research Directions Summary of Conclusions

The Value System

The Value System of a Supplier-Buyer Pair

Research Model

Testing Model for Hypotheses 1 through 4

Logistics Activities and Literature References Average Length of Transportation Contracts Preferred Supplier Performance Measures Supply Chain Performance Measures - Percentage

of Firms Using Each

Results of Test of Non-Response Bias Descriptive Statistics: Initial Tests of Relationship of Control of Inbound Logistics Activities to

Competitive Advantage Correlation Matrix - Initial Tests of Hypotheses Correlation Matrix - Initial Tests Controlling for

Firm Size and Firm Strategy

Frequency Table for Responses to Combined Timing

Advantage Questionnaire Items

Frequency Table for Responses to Combined Customized

Input Condition Advantage Questionnaire Items Results of Exploratory Factor Analysis of Inbound

Comparison of Correlation Results by Generic Strategy

Recap of Hypotheses & Results of Tests Significant Relationships Between Control of Inbound Logistics and Forms of Competitive

as a Source of Competitive Advantage”

CHAPTER ONE INTRODUCTION

“To create an incentive to prepare for tomorrow today, senior management must first be convinced of the impermanence of present success” (Hamel & Prahalad 1994-67)

Introduction of research goal; statement of purpose

As competition becomes more intense and environments are changing more

rapidly, an alternative to traditional competition for customers may entail looking

upstream into the supply chain for additional sources of competitive advantage This dissertation examines the relationship between control of inbound logistics activities and competitive advantage The Council of Logistics Management defines logistics as follows:

“Logistics is that part of the supply chain that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet the customers’ requirements” (CLM Homepage www.CLM1.org) Inbound logistics represents the material flows from a firm’s suppliers to itself from the buyer’s perspective Power shifts resulting from

ownership and/or control of inbound logistics activities have the potential to influence prices, supplier preference rankings by buyers, and ultimately the number of suppliers or

competition, firms may utilize inbound logistics to arrive at price structures, delivery

speed, and volume preferences from suppliers that may create competitive advantages

The same activities may elevate a firm’s competitive advantages while simultaneously

disadvantaging its competitors

This dissertation examines competition from a novel perspective Instead of competing for market share, this dissertation investigates the utilization of inbound

logistics in order to create competitive advantages through easier supply of critical

materials necessary in the production of products or retail/wholesale sales In other

words, while it is becoming more difficult to out-perform the competition in downstream activities, firms may be able to beat the competition through the effective management of the delivery of the material resources that they, as well as their competitors, require

An example of such activity may involve differentiable products such as in high technology industries Firms that are involved in manufacturing with, or retail/distribution

of, high technology inputs produced by their suppliers may benefit from first mover

advantages (Liebermann & Montgomery 1988) if their inbound logistics activities provide

them with earlier access to that new technology Firms that are not involved with rapidly

changing technology can still benefit from faster fulfillment of complete orders of critical

inputs by suppliers Cycle times relative to the delivery of the buyer firm’s own output are

impacted by the manner in which material flows are managed (Persson 1991) Firms may

be able to utilize inbound logistics activities in order to derive the greatest advantage from new technologies coming downstream from technologically adept suppliers or for

from the deployment of their own inbound logistics activities or control of third party logistics providers Speed, quantities, and customized arrival of material inputs result in lower costs that competitors cannot duplicate

Introduction of the Theoretical Perspectives

This dissertation will draw from many diverse disciplines from which theories of strategy have been developed The primary focus of this study will be on the relationships that exist between pairs of buyers and suppliers for materials used in manufacturing or for

goods handled by retailers/distributors It is posited in this dissertation that the buyer

firms that wield more controlling influence over the inbound logistics activities, comprising

the preparation, handling, and movement of goods, will have power over their suppliers

(OECD 1981), resulting in lower costs and/or better supplies This dissertation also posits

that firms may seek competitive advantage while looking upstream into the supply chain

These firms will actively attempt to disadvantage competitors by constraining their access

to critical material resources or denying them the use of an efficient set of supply channel

activities

Inbound logistics, which is a subset of Supply Chain Management, is one method through which firms create competitive advantages Either by providing the buyer firm

better access to critical resources or by making the total cost of procuring materials lower

than the competition, control of the supply channel can be an important source of

advantage relative to the speed, quantity, cost, and/or condition of material inputs.

easily be shifted from supplier to supplier, since delivery volume, cost, and availability are

no longer dependent upon the supplier’s outbound logistical system Control of the

supply channel enables firms to seek out the lowest total cost (made ready for use and

delivered) materials in the inbound channel

This dissertation will utilize the research streams briefly discussed here and

presented in Figure 1.1, which represents a ‘road map’ of the theoretical development of

the research hypotheses that are presented later in this work These include Supply Chain

Management (the activities or tools to be controlled) , the Resource-based View

(advantages from possession of key resources), Transaction Cost Economics (the

internalization of transactions to reduce costs), and Industrial Organization Economics

(dynamics in the competitive arena)

At the center of this dissertation is the concept of competitive advantage, which will be approached from two directions (cost and differentiation through access, timing, and customization) The Industrial/Organization Economics perspective lays out the competitive arena and its boundaries in the form of competitive industries Within these

industries are observed the competitive behaviors of member firms From this perspective

is also developed the concept of market as a competitive arena; however, in this study, the

market for consumption of the firm’s output is of secondary interest The primary interest

stems from the ability of firms in the industry to recognize necessary resources, which are potentially in limited supply or for which cost advantages may be realized From this perspective, this study is not intended to ignore competition for customers but, in fact

faster, and better suited material resources and, as a result, the firm’s competitors may be

less able to compete for customers themselves

The management of the supply chain may be utilized as a strategic weapon to

speed material flows, since “time is equivalent to money, productivity, quality, and even

innovation” (Persson 1991) Inbound logistics activities may represent the tools with

which the individual firm can alter the competitive playing field of its industry in search of

more defensible competitive advantage Porter (1985) allowed: “Firms, through their

strategies, can influence the five forces of industry attractiveness.” One of those industry level five forces is the “bargaining power” that supplier firms to the industry may possess

If a single firm can alter its relationship with suppliers, it can fundamentally change the supplier relationship for the rest of the industry: its competitors (OECD 1981) Within

industries, firm differences do exist (Cool & Schendel 1988) The necessity of maintaining

firm differences within industries is demonstrated by fashion apparel manufacturers who are continuously changing their short term differentiation advantages In fashion apparel, the advantages of differentiated products are frequently made obsolete by imitation, new innovations, fickle customers, numerous competitors, ease of entry/exit, and the countless

marketing and retail alternatives available to the industry (Richardson 1998) This takes

us to the approaches to competitive advantage upon which this dissertation will focus, as shown on Figure 1.1

data systems and supply chain techniques as a means of harmonizing organizational efforts

and achieving very ambitious long term strategic initiatives” (Poirier 1999:2) The

processes and benefits of effective supply chain management are designed to avoid the

cost inefficiencies that can occur at buyer-supplier interfaces when those interfaces are not

managed in an effective manner (Christopher 1997) There is within this stream of

literature the understanding that firms no longer compete as much as individual businesses

but as functional members of competing supply chains (Lambert, Cooper, & Pagh 1998).

specifically, the subset that relates to inbound logistics

Supply chain management is not entirely foreign to strategic management

literature Porter (1985:33) popularized the use of the value chain as a tool to analyze the

“many discrete activities a firm performs in designing, producing, marketing, delivering,

and supporting its products.” According to Porter, firms win customers by creating more

value for them than other firms The value chain is a depiction of the value creating

activities of a single firm whereas the Value System is a depiction of the linkage of several individual firm value chains together These are further discussed in the next section and shown as Figure 1.2 and Figure 1.3

Through the utilization of inbound logistics techniques, a convergence with

Industrial Organization Economics and competitive advantage will be demonstrated Two forms of competitive advantage through inbound logistics are posited in this dissertation

First, the inbound logistics activities may enable the buyer firm to control the supply

channel, leading not only to lowering the total cost of procuring materials to levels below that of the competition but also lead to raising total real costs for competitors The-

motivation for structural or relational mechanisms used by a firm in support of this may be

partly explained by the Transaction Cost literature (Williamson 1975; 1989), which states that transactions conducted between unrelated parties bear higher expenses than

internalized transactions Another effect is that, through the provision of inbound logistics activities by one buyer, the costs of logistics activities provided by the supplier must be borne by a now smaller set of customers (competitors of the buyer) The reverse effect of

second form of competitive advantage explored in this dissertation, the buyer firm may use inbound logistics activities effectively to isolate and protect a desired supply of critical and potentially scarce resources This isolation/protection may possibly extend to the

exclusion of its competitors and, thus, prevent competitors’ timely access or access at all

This second approach toward competitive advantage will be partly explained through the

Resource-Based View literature (Wernerfeldt 1984; 1995) which holds that firms in

control of resources (material resources in this context) will have advantages over firms

which do not

As Figure 1.1 shows, and as the subsequent review of the literature (Chapter 2) will elaborate, competitive advantage in downstream markets may be derived through inbound logistics activities by the firms as buyers of materials It is important at this point

to clarify the relationships between “supply chain”, “demand chain”, “value chain”

“inbound logistics”, “power and control”, and the nature of competitive advantage which

may be generated through the use of, or more specifically, ownership and/or control of inbound logistics activities by a buyer firm

Terminology: Supply Chain, Demand Chain, Value Chain & Inbound Logistics

A pragmatic definition of supply chain management is “the process of delivering

products from the raw material supplier to the ultimate end user” (Ptak 1999) Other

definitions hold that supply chain management is concerned with “networks,” which are

maintained to support sourcing of materials, manufacturing, storing, and delivering

concerned with the movement of materials in a primarily downstream direction from the external environment, into and within the firm’s internal environment, and out again into

the external environment en-route to ultimate consumption Supply chain management

looks at key processes between and within firms that exist as buyers and suppliers of

inputs, and recognizes that such firms may even work together to co-evolve (Bechtel &

Jayaram 1997) There is also an understanding in the supply chain literature that firms are

forming networks with their suppliers and/or customers in order to compete against such other networks rather than as individual firms (Lambert, Cooper & Pagh 1998) A feature conspicuously missing from the concept of the supply chain is the process of marketing and/or selling the products to customers/consumers, and the transmission of demand information backward into the supply chain network; the demand channel (Ptak 1999) Mis-alignments between demand and supply within the channel result from uncertain end customer demand which becomes less clear as it is conveyed up through the supply

channel (Poirier 1999)

More commonly used in strategy literature is the term “Value Chain” which was

elevated to prominence by Porter (1985) This concept combines the elements or

processes that exist in the supply chain relating to the movement of materials, and the

demand chain, which relates to influencing demand and conveying demand information

backward through the channel into a unified process (Ptak 1999) The resultant generic view (nine activities) of the value chain is presented as Figure 1.2, and includes the

activities a firm performs in the course of “designing, producing, marketing, delivering,

and supporting its product” (Porter 1985:33) The formation of the value chain of

individual firms may be similar or different, and is used to determine and highlight sources

of competitive advantage Each of the primary activities (inbound logistics, operations, outbound logistics, marketing & sales, and service) are activities which add value

(perceived utility less costs) The four support activities (procurement, technology

development, human resources management, and firm infrastructure) are also involved in

the firm’s competitive efforts in support of primary value adding activities

Figure 1.2 — The Value Chain

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

Adzpeed from Miches! Porter 1985 “Competitive Adrantage™ NY: The Free Press

The supply chain and demand chain are multi-firm networks, yet, the depiction of the generic value chain is of a single firm Porter (1985) links supplier firm value chains, other channel firm value chains, and ultimate buyer value chains, together into The Value System (presented as Figure 1.3) The depictions of the Value Chain and supply chain are

not irreconcilable Each firm in the supply chain may be depicted as a value chain, and each value chain linked into a Value System as shown in Figure 1.3

Figure 1.3 - The Value System

Adapted from Macksel Porter 1965 “Competitive Advantage” NY: The Free Press

Logistics efforts can be strategically deployed to influence competitive forces, develop innovative uses of existing logistical systems, and improve existing logistics

systems (Persson 1991) Firms may link activities within their single value chains, or may

form linkages between certain activities in their value chain and with activities in their

supplier value chains Of primary concern here is the linkage of the buyer’s inbound logistics activity with the seller’s outbound logistics activities and the control of such activities (Figure 1.4) Inbound logistics activities are defined by Porter (1985: 39) as

“activities associated with receiving, storing, and disseminating inputs to production including material handling, warehousing, inventory control, vehicle scheduling, and

“collecting, storing, and physically distributing product to buyers such as finished goods warehousing, material handling, delivery vehicle operations, order processing, and

scheduling.” Also of interest would be the supplier’s service activities, which include

product adjustment, and the buyer’s procurement activities, which include dealing with

suppliers and maintenance of related information systems Accordingly, value chain

activities performed by the buyer but not by the buyer’s competitors may become a source

of competitive advantage Inbound logistics activities are not limited to those identified above and could easily include or replace activities listed above as outbound logistics activities of the supplier Hence, if a buyer firm were to include such activities that would add value to the firm, and if competitors did not or were not able to include similar

activities, the buyer firm would have competitive advantage

For purposes of simplification, logistics activities will be classified into three

categories (as depicted in Figure 1.4): transportation activities, storage and handling activities, and information and services activities (adapted from Bowersox 1978; Caplice

& Sheffi 1995) Table 1.1 provides examples of logistics activities by these categories as well as sources for further description of each This dissertation posits that buyer firms seeking increasing control of the inbound supply channel will pull logistics activities out of their suppliers’ outbound logistics and include them in their own inbound logistics

activities.

Figure 1.4— The Value System of a Supplier-Buyer Pair

Inb Opera- |Outb- [ Mrktg [Service : Opera- [Outb [| Mrktg [Service

ILestes | tions fLestes | & Sis frets tons [Lotes [& Sb

Storage & Handling Activiti Storage & Handling Activiti

Efforts to

Transportation Activities Control Transportation Activities

Information & Services Information & Services

Activities

are Pulled

Logistics Actrvihes Between Suppher & Buyer

Any critics who were to discount the potentially strategic nature of supply chain

management should consider how AMAZON.COM utilized a redesign of the supply chain,

which included fewer links and lower inventories, to disequilibriate its industry (Fine

1998) Powerful retailers like Wal-Mart, Kmart, and Target receive preferential

treatment from their suppliers based on such relationships (Daugherty, Ellinger & Plair

1997: Norek 1997) In fact, many companies now manage their suppliers as a portfolio

(C.A.P.S 1998; Kohn 1996).

Activities by Category

TRANSPORTATION ACTIVITIES

Alliances and/or contracts with third party carriers

Communications with third party carriers

Schedule/route transport of materials

Evaluation of carer performance

Negotiation of freight rates with carriers

Own and operate transportation equipment

Audit & payment of freight invoices

Freight carrier selection

HANDLING & STORAGE ACTIVITIES

Customized packaging service to meet buyer needs

Customized packaging/repacking-quantities

Shipment consolidation & Bundling

Warehousing of inputs owned by the supplier

Shipping container/carton/packaging material &

systems

Packaging design services for transport effectiveness

Warehousing of inputs owned by buyer

Material handling equipment

INFORMATION & SERVICES ACTIVITIES

Shipment tracking system/information

Computer systems tor scheduling procurement (ERP)

Efforts to shorten the order cycle

Product availability / demand information

Notification of disruptions in inbound supply channel

Access to supplier computer system

Power and Control

“Many industries including retail, grocery, and other high inventory industries are seeing increasing advantages through the effective management of materials through inbound and outbound channels” (Bechtel & Jayaram 1997, emphasis added; OECD

Discussed/Described in

Gentry, 1991 Gentry, 1991

Gentry 1991

Gentry 1991

Norek 1997 Norek 1997 Van Buer etal 1997 Daugherty etal 1997 Norek 1997

Norek 1997 Daugherty etal 1997

Gentry 1991 Persson 1991

Persson 1991

Persson 1991

Persson 1991

Bowersox, 1978 Bowersox, 1978 Bowersox, 1978

Bowersox, 1978 Bowersox, 1978

Bowersox, 1978 Bowersox, 1978

Gentry 1991

Bowersox, 1978

Bowersox, 1978

Bowersox 1978 McKinnon 1990 Bowersox, 1978

Minnahan 1998 Minnahan 1998b Rushton & Saw 1992 Christopher 1997 Bowersox, 1978 Bowersox, 1978

toward the buyer (e.g., Galbraith 1956) As found by Norek (1997), retail power has been

demonstrated to be a force shifting the provision and control of activities between

vertically linked members of the supply chain Cox (1997) emphasized the importance of

the control of critical supply chain elements and that a firm’s generic business strategy

requires an understanding of which supply chain elements to possess The nature of

activities which occur in the supply channel between supplier and buyer may not change as

the channel evolves; however, the level of control over those activities may shift

As a new supply channel is forged, the supplier may initially provide or control a disproportionate share of those channel activities Although the activities that can be

utilized in the creation of effective supply chains are not easy to find (LaLonde & Pohlen

1996), it is the contention of this dissertation that efforts along these lines, specifically inbound logistics management, will be envisioned as more lucrative from the buyer

perspective In 1994, 80% of the total mass merchandising discount channel sales

belonged to Wal-Mart, Kmart, and Target (Norek 1997) These retail giants participate in

numerous supply chains with varying degrees of control of inbound logistics The power exerted by buyers against suppliers is often a considerable force, which drives the

formation of supply chain relationships (Lalonde & Pohlen 1996)

There may be yet another reason for exerting power upstream into the inbound logistics between the firm and its suppliers Penrose (1959) stated that a firm is, in

addition to an administrative organization, also a collection of resources The control of inbound logistics activities may lead to the power of buyers over suppliers This power

may be utilized to influence the quantity and/or availability of inputs which they, as

manufacturers, need in order to produce their goods (or as retailers, need in order to sell)

The question of which suppliers to influence and control is a matter of understanding input

issues such as scarcity, positive value versus negative value of holding resource stocks

(Leonard-Barton 1992), and the costs of acquiring, holding, or shedding them if necessary

(Wernerfeldt 1995)

Inherently, holding a stock of scarce resources may be a source of competitive advantage A buyer’s control of inbound logistics may render a material resource less

easily available to competing firms which need it as well If a single computer

manufacturer were able to receive an newer (new supplier technologies) or greater

proportion of available micro-processors, and receive them earlier than other competitors, the competition could become disadvantaged, especially since the life spans of such

technologies seem to be getting shorter (Fine 1998) A buyer, through control of inbound

logistics activities, may be able to assert power over the supplier, which can lead to such

results As firms compete with each other for customers and share of market, they may also need to compete for share of critical material resources to serve those markets The ultimate goal of this work is to demonstrate that the control of inbound logistics activities, representing power shifts from suppliers to buyers, allows suppliers to be better able to acquire a cheaper, larger, better, and faster supply of material resources than their

competitors who, as buyers, hold less power over suppliers Thus, through cheaper,

larger, better, and faster supply of critical resources, buyer firms may attain positions of

competitive advantage.

Competitive Advantage Derived Through Inbound Logistics

The existence of differences between firms operating within the same industries has

been demonstrated in several studies (Rumelt 1991; Jacobson 1988; Hansen &

Wernerfeldt 1989; Cool & Schendel 1988) Hamel and Prahalad (1994:31) encourage management thinking along the lines of : “Competition for the future is competition for

opportunity share rather than market share.” Opportunity may be sought through the

control of inbound supply in four ways The first is the ability to have a buyer firm’s

quantity requirements prioritized over the buyer’s competitors Second, a buyer firm can

receive earlier access to new products or technologies developed by the supplier Third,

the buyer may be able to have the supplier customize the presentation (packaging

quantities, appearance, and configuration) for easier handling once those inputs arrive at

the buyer’s facilities Fourth, the control of inbound logistics activities may enable the

buyer to enjoy a total cost structure for inputs which is not available to competitors who

have no such control

Inbound logistics can set the firm apart from competitors Wal-Mart is a clear example of how a capability in inbound logistics supports its cost leadership strategy Through inbound logistics, firms may be better suited to take advantage through

establishment of relationships, channel control, or channel power to position themselves

more favorably within the industry’s competitive environment, which may lead to

competitive advantage

The next section will introduce and discuss the research question that this study

will pursue.

three differentiation advantages, each of which may not be available to, or barred from

competitors; The differentiation advantages include the ability to procure demanded quantities of material input from suppliers with priority over similar demands of

competitors, advantages inherent in being able to receive material inputs faster than

competitors, and finally, the ability to receive material inputs in a form which is

customized to suit the needs of the buyer firm (special packaging, lot sizing, etc.) while competitors may be unable to accomplish the same for their operations

Cost Advantages The buyer firm in control of inbound logistics activities should be able

to configure the logistics system in such a way that it is more efficient and effective

relative to its strategy than one provided/controlled by the supplier or a third party A

firm such as Wal-Mart may possess the inbound logistics capability with which it may derive power sufficient to impact Wal-Mart’s relationship with its suppliers, namely to

influence price In this case, these activities are not shared with suppliers but strictly

controlled and operated by the purchasing firm Wal-Mart does not serve the other

customers of the supplier, including competitors of Wal-Mart, with its logistics systems Power asserted by Wal-Mart results mainly from the switching costs the supplier would face in replacing the Wal-Mart business In as much as Wal-Mart operates its own

inbound logistics system, a supplier from which Wal-Mart may have purchased a large

share of output would need to not only find another buyer of comparable volume, but

would also need to provide logistics activities to deliver that output The need to provide logistics activities to the new customer represents a potential increase in cost in serving a competitor of Wal-Mart and lower potential margins or higher prices charged to the competition The increased cost of logistics activities to maintain the same volume of sales represents a switching cost which the supplier must consider when evaluating the

requests of the buyer This places power in the hands of the buyer, which may be wielded

toward obtaining price concessions from the suppliers

Differentiation Advantages Another interest in this dissertation is where the buyer firm

utilizes its competence in inbound logistics to secure an asymmetric proportion of supply from a source of limited materials needed by the firm and all of its competitors High technology components is one example of such material Based on the speed of new

technological innovation and the rapidity of obsolescence in preceding technologies (Fine

1998), the speed with which competitors gain access to supply of that technology and/or the ability to procure a higher and/or earlier proportion of its distribution could be

essential to the firm pursuing a differentiation strategy Forms of differentiation, however,

can vary greatly (See Porter 1980) Wheelwright (1984) categorized differentiation in

terms of quality (product/service features and/or freedom from defects), dependability (reliability of delivery of product/service), and flexibility (volume flexibility and product

flexibility) All of these may be enhanced through relationships with suppliers who, in turn, may be influenced by levels of inbound logistics control

It is posited in this dissertation that competitive advantages that support

differentiation strategies may be generated, enhanced, and/or sustained through the

effective ownership/control of inbound logistics activities Manufacturers as well as

retailers rely upon their suppliers to provide them quality in terms of being defect free (Wheelwright 1984) material inputs or products Buyer firms’ procurement staffs should be aware of the quality performance of any suppliers for a particular product they may require Fitzgerald (1998) found that 55% of surveyed firms singled-out preferred suppliers A supplier with a consistent defect-free reputation (Motorola’s six sigma

program, for example) would be likely to attract more buyer firms than other suppliers a situation which may lead a buyer firm and its competitors to compete for that particular supplier’s output Many buyer firms also rely on features (Wheelwright 1984) inherent in

supplier products in order to differentiate their own Auto manufacturers began to install

sound systems possessing the nameplates of electronics leaders instead of their own in order to help differentiate their products in the luxury category from other firms Firms in

high technology industries such as computers and peripherals may also rely on suppliers

known for their consistent innovation (example: Intel) in order to keep their products in front of, or at least equal to, that of their competition Buyer firms may, in fact, compete

for suppliers known for their ability to add features desirable in the buyer firm’s markets

Firms also differentiate on the basis of dependability (Wheelwright 1984), or

getting deliveries when the buyer firm’s customer wants them Such service depends on

the firm being able to acquire/possess the necessary input materials at the most appropriate time of need Suppliers may be evaluated and selected for this ability, and competitors of

the buyer firm may also desire to transact business with such suppliers Buyer firms may,

in fact, compete for suppliers known for dependability, in order to be differentiated in their markets based on their own dependability

Firms also differentiate on the basis of flexibility in terms of product capabilities or

fluctuations in volume (Wheelwright 1984) As much as firms desire to provide flexible

options to their customers, in order to do so, these firms as buyers may also need to

depend upon suppliers for the same The ability of a firm to react to a sudden spike in demand may depend on that firm’s ability to procure the necessary inputs Buyer firms may compete for suppliers’ capacity to meet sudden changes in volume; changes in

volume which may impact all the competitors in the buyer’s industry as well

In order to exert some power over the suppliers to the end of getting preference or priority above the competition for supply from suppliers offering the best quality,

dependability, and/or flexibility, inbound logistics ownership/control may be a key The supplier’s dependence upon logistics activities controlled by one buyer firm places them in

a lower power position relative to that buyer, since the cost of supplying the competitors

of that buyer may include now increased logistics costs which the supplier may still need

to provide The power inherent in control of the supply channel through inbound logistics

activities is such that the buyer may require priority in quantity, timing, and/or the

customized presentation of the inputs themselves, in order to achieve, enhance, and/or sustain competitive advantage

The Research Model

The research model as presented in Figure 1.5 seeks to determine if a relationship exists between buyer control of inbound logistics activities (between the firm and its

suppliers of critical resources), and competitive advantage in terms of cost, access, timing,

and customization Again, it is important to reiterate that the outbound logistics activities

of the supplier and the inbound logistics activities of the buyer (in their respective value

chains) represent proportional parts of the same linkage between the two firms (Figure

1.4) Only the perspective (upstream or down, inbound or outbound) in the supply chain

changes between supplier and buyer The supply chain is, in fact, a linkage of several pairs

of buyer-supplier relationships

Figure 1.5 — Research Model

Cost advantage relative to competitors net derived fom power over suppliers

of Inbound Logistics

+ competitors derived from power over supphers

Customization of mput advantage

gi relative to competitors derived from power over supphers

This power between suppliers and buyers, in paired relationships, and the dynamics

of the balance of power between the two is central to this dissertation and evidenced by

the ownership/control of these activities by the buyer or supplier As such, the model

represents the buyer influence on the supplier existent in each pair of buyers and suppliers

Since firms take actions to shape competitive forces in an industry (Porter 1985), a buyer

firm can take actions to shift control of inbound logistics activities, and thus power, to its

favor while at the same time reducing the power in the similar relationships of its

competitors who are also buyers

It is posited that the locus of control of inbound logistics activities between the buyer and supplier will have a positive influence on competitive advantage relative to the buyer’s competitors Through the loss of control of logistics functions, the supplier becomes dependent upon the buyer in several ways, which leads to the shift in power For

example, by locking up of one or more suppliers into dependent relationships, the

remaining suppliers become more concentrated in their relationships with remaining

competitors The loss of relative power by the competing firms may translate into a

diminished ability to effectively meet their strategic goals (cost or differentiation) The competitors may be disadvantaged in their pursuit of a differentiation strategy because the buyer firm may have better access (faster, larger quantities, customized service) to critical

input resources In addition, the competitors may be disadvantaged in their pursuit of low

cost strategies because the buyer firm controlling inbound logistics is able to improve its

cost position in a way not available or observable to the competitor The supplier’s cost

to serve those competitors may be higher due to the supplier no longer holding control

over as many of its outbound logistics functions, or because the supplier has diminished economies of scale relative to logistics expenditures because one of their major customers

now provides its own

Importance & Anticipated Contribution

Persson (1991) pointed out the logistics had been ignored in much of the strategy

process and, is often at best, relegated to the status of an unavoidable cost to be

minimized In fact, results of this study demonstrate that this attitude may still be

prevalent McGinnis & Kohn (1990) pointed out that strategies involving coordination of

logistics activities are not well understood and that the interaction of logistics with other functional strategies calls for further study Skinner (1984) called for more linkage

between the operations management discipline (which encompasses supply chain

management) and strategic management Logistics, or in other words, the functions which

support the procurement and movement of materials from the supplier to the buyer,

should be linked to the content of a firm’s strategy; however, the consideration of logistics

either inbound or outbound has rarely been seen in strategy research (Persson 1991)

In practice, logistics may not be considered until the implementation phase of the

process of strategic management Some of the sources of competitive advantage, such as

reliability of delivery timing and quality of the arriving goods, require the active

consideration of logistics in the design of supply chains (Morash & Clinton 1997) In practitioner circles, the importance of supply chain management is growing This is

further emphasized by the fact that one fourth of companies interviewed in another study

picked supplier relationships as a top priority (C.A_P.S 1998)

Buyer-supplier relationships and supply chain management are important for

relationships other than just retailers and their immediate (first tier) suppliers The

literature is growing in supply chain management, logistics, just-in-time, and other areas related to coordinating manufacturing facilities and component suppliers (Teece, Pisano

& Shuen 1997) Competition in a number of material flow segments has been increasing,

which ultimately leads to stronger downstream demands concerning logistics performance

(Persson 1991) The procurement of material resources has been elevated from the

functionality of purchasing to being recognized as a key strategic resource by firms such as

IBM (Porter, A.M 1998) New technologies and merchandise innovations have been

responsible for some of the power shifts from manufacturer toward retailer (LaLonde &

Pohlen 1996)

An indication of the importance of controlling logistics activities is the results of a

study (Table 1.2) which indicated that the length of transportation contracts (control of a

logistics activity) were increasing beyond the short range of less than one year (Minahan

1998)

Table 1.2 Average Length of Transportation Contracts: (Adapted from Minahan 1998)

Free-on-Board (FOB) Shipper, where title passes to the purchaser at the supplier’s

shipping dock, is now the most frequent form of shipping terms and is evidence of more control over inbound activities being held by buyers (Gentry 1991) In spite of its initial use by the suppliers to recognize a sale earlier, FOB Shipper is now more indicative of

control of the items as they change hands

Some practitioners may not be ready or willing to consider, or may be blind to the

control of inbound logistics, as a source of competitive advantage For example, Sears

traditionally counted on location, dominance, and purchasing volume to maintain its

competitiveness; however, “well into the 1980’s, Sears’ position papers did not even list

the company [Wal-Mart] among the competitors to be watched” (Leonard-Barton

1995:31) Wal-Mart utilized its inbound logistics system tc support its low cost/low price strategy while Sears, which competed under a different paradigm, did not even notice Buyer power is also becoming more concentrated in other retail segments, as well as in

manufacturing segments Ford Motor Company at one time utilized 10,000 parts

suppliers, which has been pared down to 2,300 in 1996 and aims for 1,150 by the end of

1999; Xerox used 5,000 in 1990 and aims for 300 by 1999 (Christopher 1997:10-11)

Many firms use inbound logistics measurements in their selection of preferred suppliers The following measures were presented by Droge, Germain, & Stock (1991)

and, on a scale of importance (5 being most important), a survey of supplier evaluation

criteria demonstrated the following averages (Table 1.3).

Price

On Tume Delivery Service Quality Good Communication Easv To Work With Percentage Shipped Complete Flexibility

Short Order Cycle Willingness to Customize Service Consistency of Order Cycle Customer S:

Early Notification of Disruption Positive Attitude

Management Quality

‘Master Carton Pack Quality Shelf Unit Pack Quality Automatic Substitution Rate

4.46 4.12 4.00 3.89 3.81 3.70 3.69 3.68 3.68 3.64 3.63 3.42 3.42 3.36 3.27 3.13 2.53

Table 1.3 Preferred Supplier Performance Measures

logistics and its management may impact

This dissertation represents a substantial effort to incorporate the inbound logistics

component of supply chain management into strategic management processes by

promoting consideration of its contribution in the strategy formulation process rather than

deferring it until the implementation phase Inbound logistics can be a source of

competitive advantage, as opposed to a mere detail in the implementation of strategies

developed in its absence.