The Limits of Lean Management Thinking: Multiple retailers and food and farming supply chains

The Limits of Lean Management Thinking:

Multiple retailers and food and farming supply chains

Author - ANDREW COX, CBSP, Birmingham Business School

               DAN CHICKSAND, CBSP, Birmingham Business School

INTRODUCTION-

Based on a case study of red meat supply,it is argued that  the adoption of lean practices internally may be appropriate for all participants in the industry, but the inter-organizational aspects of lean may not be easy to apply in practice, nor appropriate, for many participants.For some participants — especially the multiple retailers—the adoption of lean principles may lead to a positive outcome with stable and/or increasing profitability. For the majority of participants in these industry supply chains, however, the adoption of lean principles may result in a high level of dependency on buyers and to low or declining levels of profitability.

The Crisis in UK Red Meat Supply Chains and the Government and Industry Response-

Major threats faced-

• Major safety and health related problems––like the Foot and Mouth Disease
• BSE––to the de-coupling of farmers CAP subsidies after 2005.
• Consequently there have been changes in consumer preferences, with per capita meat consumption falling from 20.9 kg in 1980 to 16.6 kg in 2002 
• Increasing concentration of market power, with 75% of fresh/frozen beef sold through multiple retailers.
• Changes in consumer lifestyles and demand

Response of the U.K. Govt.-

Formation of a Policy Commission, which produced a report into the creation of a sustainable future for farming which led to the creation of three industry-wide agencies to facilitate new thinking in red meat supply chains  which are as follows-

Food Chain Centre (FCC) -to support lean thinking and efficiency improvement across all British agriculture sectors (dairy, cereals and fresh produce)

Red Meat Industry Forum(RMIF)- to oversee ten projects to assist in the improvement of efficiency and competitiveness in British red meat supply chains

English Farming and Food Partnership (EFFP)-to focus on the potential for collaboration within farming

The RMIF  started with value chain analysis project to study and map ten value chains within U.K. agriculture i.e sugar cane and potatoes,cereals , beef, milk, oilseeds,pig, poultry,salads,vegetables and sugar beet based upon lean thinking and integrated supply chain management principle. The rationale was that, by understanding the causes of waste and inefficiency from poor co-ordination and uncertainty, it would be possible to generate win-win outcomes for the majority of participants in the industry. Unfortunately,while there has been considerable success in identifying the sources of waste in the ten value

chains analysed, the building of collaborative intracompany teams to generate win-win integrated supply chain improvements has not been very successful. The major reason for this it is argued because it has been very difficult to achieve the desired levels of trust between participants in the chain (Simmonset al., 2003). This is an explanation for failure that is often used by analysts of non-integrated and poorly co-ordinated buyer and supplier relationships. The explanation of the failure are based , upon operational criticisms of the lean paradigm and, second, on the commercial critique from the power and leverage perspective. The ten VCA studies outlined above were predicated on emulating the lean and highly collaborative approaches adopted, initially, by Toyota in the Japanese automotive sector. This approach seeks to find ways to deliver exceptional value to end customers by finding ways of eradicating waste and inefficiency throughout the supply chain.There are, however, writers who have argued that lean approaches may not have universal applicability for all organisations. The critique of the lean way of thinking can be divided broadly into those that focus primarily on operational issues (agile and batch critiques) and those that focus on the limits imposed by the need to create a commercial and operational synergy before this approach

can be used by buyers and suppliers throughout a supply chain ( power and leverage critique).

Agile and Batch Production: The Operational Critique of Lean . Agile contends that the lean

approach operates best when there is high volume, predictable demand with supply certainty, so that functional products can be created. In low volume, highly volatile supply chains, where customer requirements are often unpredictable and supplier capabilities and innovations are difficult to control,a more responsive or agile approach, based on innovative products, is appropriate operationally.

Operational appropriateness denies the universal applicability of the approach as a system of production.

It is argued that there is considerable evidence in the automotive sector of the continuation of batch and craft based systems of production amongst speciality and specialist component manufacturers. Furthermore, there is little evidence that all production systems are moving towards the lean model in all industries. This is because just-in-time flow for production cannot be sustained unless production leveling is possible within the organisation internally and with the suppliers in the supply chain externally.

The Power and Leverage Perspective: The Strategic and Commercial Critique of Lean It emphasis on one–sided commercial benefits that flow from suppliers to buyers when lean partnering approaches are adopted, and call for a more equitable approach to the sharing of value in the chain from waste reduction and inefficiency improvement programmes. This approach contends that there can never be any one single best way (lean or agile) of managing business strategy and operational delivery. On the contrary any approach that claims universal applicability must be false because the business environment is in constant flux and this requires companies to be flexible about which operational means are the most conducive for sustaining business strategy.

    This approach also holds that whether or not a company can pursue any operational means to achieve its commercial ends successfully depends, ultimately, on the power circumstances it finds itself in currently, and whether or not it has opportunities to leverage the desired outcome in the future. Buyers normally will be in a position to achieve all that they desire operationally and commercially at the expense of suppliers if they are in a position of buyer dominance (>) and, sometimes, when they experience independence (0). When situations of interdependence (=) occurs it is normal for the buyer and supplier to share the value from the exchange relationship; when supplier dominance (<) occurs it is normally the supplier who is able to achieve all of their operational and commercial goals at the expense of the buyer. This is known as Janus-faced Dominance. It occurs when a company appropriates the maximum share of value for itself in the form of above normal returns (rents) by achieving both buyer dominance upstream and supplier dominance downstream .It is under these circumstances that one might expect companies to be able to consistently earn above normal returns commercially. The problem for companies is, however, that, if they are not able to operate as sellers in supplier dominance (<) or interdependence (=) downstream, then it is unlikely that above normal returns will be made.

Flaws in universal application of lean approach

From this perspective the lean approach may suffer from serious flaws strategically. Even before one considers whether or not the lean approach is desirable operationally, one must question whether this commercial model (based on passing value to customers in order to win volume, but with relatively low returns) is one that companies should be seeking to emulate strategically. There is a further commercial issue with the delivery mechanism favoured by advocates of both lean and agile operational approaches. While equitable sharing of commercial  value is one approach to exchange, it may not be the best way to maximise commercial returns for either party. Power circumstances underpin the successful operational and commercial implementation of exchange relationships. This is because, unless there is a power situation of buyer dominance or interdependence, long-term collaboration cannot be sustained by a buyer. lean approaches cannot be implemented successfully within supply chains as a whole unless they are characterised by extended dyadic exchange transactions of buyer dominance and/or interdependence.  Lean approaches may be relatively easy to implement internally, they may be very difficult to implement externally particularly if the power and leverage circumstances are nonconducive, and also if suppliers lack the competencies internally to undertake what is required.

Testing Lean Thinking in the Beef Industry Using Power and Leverage Analysis

Since 2002 lean has been the approach favored by government agencies for the creation of sustainable farming in the UK. In recent years, however there has been a growing scepticism amongst some industry participants about the utility of lean thinking for everyone in the industry. This problem arises because there is rarely a balance of specific types of meat cuts from the beasts that are slaughtered upstream to allow for a sustainable and predictable supply, enabling productive efficiency, downstream. As a result of a mismatch between demand requirements and supply availability there is nearly always inefficiency and undesirable commercial costs to be borne at the primary production (processor) stage of the supply chain that is almost impossible to eradicate.

On the Nature of Power and Leverage in UK Beef Supply Chains

a)The Complexity of UK Beef Supply Chains: Directly impacting on the power of buyers and sellers at all points in beef supply chains, is the fact that different types of beef products are created from an ‘exploding beast’. This means that, unlike many supply chains that are primarily constructed to bring together complex supply inputs into one finished product, the beef supply chain is partially characterized by the opposite.On the demand side, while at the national level the demand for beef is known and fairly predictable given seasonal and weather fluctuations, for an individual producer demand has often been uncertain. Farmers typically receive poor forecasts and have no certainty of demand or price, because there are no formal contracts in place with customers for the suckler beef producers. The‘Supply Agreement’ normally has detailed specification parameters (e.g. farm assured beef,conformity & leanness requirements, packaging specifications and future requirements — although demand is uncertain and one week processors may have to supply X amount of mince, the following week 2X of mince). Multiple retailers also normally specify that beef to be sold as fresh or frozen cannot be procured via the auction markets for ‘animal welfare’ reasons.

b) The Power Regime for Fresh/Frozen Beef Products

The power relationship between the end consumer and the multiple retailers in this chain are characterised by independence (0) or supplier dominance (<).This is due to the following major factors:

• the relatively low number of alternative multiple retail suppliers to choose from in specific local markets;
• there are many potential alternative customers;
• the volumes being purchased by consumers are relatively low;
• the switching costs for both the supplier and buyer are low;
• search costs are low for the buyer but bundled supplyofferings within particular retail outlets creates lockinwithin particular localities
• the products-many are relatively standardised but information asymmetry favours the supplier

Given this, the power structure oscillates between independence (when there are many alternative sources of supply for fresh/frozen beef close-by, with constant price wars taking place and the product is a low value commodity) or supplier dominance (when there are no real alternative sources of supply closeby,with no price wars and the product is a high value premium product). In such an environment there are few incentives for buyers or sellers to enter into long-term collaborative relationships. The same logic is true for multiple retailers. The multiple retailers will use all types of loyalty programmes or loss leaders (and other promotional campaigns) to stop end customers switching to alternative sources of supply but, while they may seek lock-in to their overall offerings, this cannot be regarded as a form of collaboration with the end consumer.

The multiple retailers oscillate, therefore, between more or less adversarial forms of arm’s-length relationship

management with their customers. When there are loss leaders they are operating non-adversarially, when they are premium pricing particular products they are operating adversarially to maximize returns.

Multiple retailers normally have buyer dominance when they source commoditised products that are to be sold on a price basis relative to a given quality standard. This is because-

• Few buyers, with many potential suppliers;
• High volume relative to supplier business turnover
• Supplier switching costs high, those of the buyer relatively low;
• Buyer account is very attractive to suppliers for revenue;
• Supplier offerings are standard and commoditised;
• Buyer search costs low; and,
• Information asymmetry favours the buyer

In these circumstances the supplier is in a stronger bargaining position with the retailers, and they ought to be able to extract a higher share of the commercial value from the exchange. The multiple retailers have recognised that, in order for them to appropriate the maximum share of value, it is essential that they minimise the power of supplier brands by creating their own premium brands.The commercial benefits of lean operational collaboration are passed to the multiple retailer and not retained by the processor, who remains highly dependent operationally and commercially on the multiple retailer, and acts as willing supplicant to their every requirement.

Conclusions-

The power regime that exists in the fresh/frozen beef supply chain for multiple retailers and integrated processors are not favorable for the adoption of lean practices.

Lean practices can best be applied by individual companies to eradicate non-value adding waste and inefficiency. In this power regime lean inter-organisational supply relationships based on collaboration are only really appropriate for the multiple retailers, the integrated processors and their preferred agents in the chain. This is because it is only at these points in the chain that the power structures tend towards the buyer dominance and/or interdependence situations that support longer-term collaborative and lean approaches.

      Overall, attempts to drive lean collaboration based on flow principles throughout the fresh/frozen beef supply chain are bound to fail because the problem of ‘carcass imbalance’ cannot be fully resolved.

       The lessons for participants upstream is that they must either use opportunism as best they can by playing the market, or transform the current power situation to their advantage by developing and marketing their own premium brands.One of the major critiques of the lean approach is that it may be difficult to implement operationally if flow production is not possible. It means that the adoption of lean management thinking in red meat supply chains for fresh/frozen beef in the UK may assist some industry participants operationally and commercially, but it does not appear to be a recipe for sustainable competitive advantage for very many participants outside the multiple

retailing stage of the chain.