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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

Abstract

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,

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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).

Outsourcing alliance is a seller’s contractual arrangement with a vendor to provide a number of closely linked functions as an agent of the seller (Fill and Visser, 2000; Johnson and Schneider, 1995; Maltz, 1994; Lieb et al., 1993). Outsourcing alliances can be cemented through simple informal word-of-mouth arrangements or through contractually binding agreements (Min et al., 2005; Sporleder, 2006). Experiences with diverse forms of arrangements reveal that the success of alliances is often determined by how cohesively partners work together to achieve their objectives rather than by the rigor of their contractual agreements.

Most outsourcing decisions are informed by resource based and transaction cost economics theories of firms (Halldórsson and Skjøtt-Larsen, 2004; Bolumole, 2001; Berglund et al., 1999; Dess et al., 1995; Jones and Hill, 1988). These theories assume that

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resources are heterogeneously distributed between firms and that these resources are not readily transferable. Because of differences in resource endowments firms possess unique core competencies and therefore differentiated competitive advantages (Logan, 2000; Dess et al., 1995). Beliefs regarding complementarities of the unique competencies of supply chain partners often encourage firms to explore collaborative ventures.

Outsourcing alliances are predicated on partners’ desires to add-value and create differentiated advantages, advantages that provide some level of uniqueness and competitive strengths (Christopher and Towill, 2000; Mintzberg, 1994; Peters, 1990). Increasing the value of propositions to customers helps engender customer satisfaction and this could lead to greater customer loyalty and reduce the threat of customers switching to competing suppliers (Rodriguez et al., 2006; Kurnia and Johnston, 2001; Cox, 1999a). Customer value propositions are not only enhanced by providing physical products that align with the quality, price and other product specific attributes but also by increasing service quality (Bititci et al., 2004). Service quality is substantially influenced by the architecture of the supply chain (Muller, 1991, 1993).

Firms tend to outsource functions that are not their core competency and consequently believe that undertaking such services in-house will not add-value to customers (Brannemo, 2006; Johnson and Schneider, 1995; Amaldoss et al., 2000). Outsourcing enables firms to concentrate on functions at which they are best, simultaneously accessing the capabilities and resources of other actors (Logan, 2000; Foster and Muller, 1990). Specialist distributors often provide expertise and knowledge about customers that the firm might not possess in-house or expertise and knowledge that is difficult or costly to obtain from elsewhere (Sheehan, 1989). By sharing unique and scare resources and capabilities, alliance partners are better positioned to increase customer value through providing better quality and levels of service, generating greater productivity and efficiency in the supply chain and creating enduring customer relationships (Min et al., 2005; Cante et al., 2004; Smith et al., 1998; Probert, 1996; Shaw and Gibbs, 1995).

Cost saving is a major driver of outsourcing alliances. Cost savings can arise from faster inventory turnover (Muller, 1991, 1993) and reducing capital investment in facilities, equipment and human resources (Lacity et al., 1995; Sheffi, 1990). The rapid development and adoption of advanced technology in all areas of business operation including production, processing, information communication, logistics, warehousing, transport and customer relationship management dictates continued and early adoption of new technology in order to remain competitive in dynamic market environments. Large capital investments are beyond the resource capabilities of most businesses particularly SMEs. Outsourcing presents opportunities to share the cost of investments with other supply chain actors. Firms specialising in providing transport, warehousing, logistics and marketing services could potentially achieve greater efficiencies through collaboration rather than by pursuing unilateral arrangements with large numbers of suppliers and customers (Thron et al., 2006; Barratt, 2004; Christopher and Towill, 2002).

Distribution outsourcing alliances enable suppliers to penetrate unfamiliar markets by gaining better understanding of market needs and opportunities (Maltz and Ellram, 1997; Maltz, 1994; Bence, 1995). Where the distributor has greater market expertise; customer service, including in-market sales activities, can be conducted more efficiently by the distributor. Customer service is rapidly becoming a major outsourced activity (Daugherty et al., 1996). Outsourcing to a firm that deals with many other firms

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often provides access to knowledge on performance within the industry and thus also provides the opportunity to benchmark performance against other actors including competitors. Outsourcing thus presents opportunities for alliance partners to engage in joint learning and joint problem solving (Huber, 2004; Quinn, 1999; Kohli and Jaworski, 1990). Such joint initiatives provide knowledge exploitable in constantly improving customer service, operating costs and market performance including new product development initiatives (Lemke et al., 2003; Goffin et al., 2000; Monczka et al., 1995).

That new product introductions and early introduction of new products can provide substantial competitive advantages is often overlooked. Review of extant studies on new product development and constant quality improvement through supply chain engagements reveal that past studies have focussed primarily on the high technology and large business sector (Lemke et al., 2003; Goffin et al., 2000; Monczka et al., 1995). There appear to be a significant gap in knowledge on supplier-reseller engagements in new product development and introduction within the food SME sector.

The pursuit of greater integrity and cost savings in the supply chain has also resulted in greater rationalisation with more and more firms forming alliances with fewer, larger, technically efficient and innovative partners (Min et al., 2005; Christopher and Towill, 2002). Using fewer alliance partners can achieve efficiency gains and therefore greater commitment to the joint enterprise (Thron et al., 2006; Barratt, 2004). For example, by using fewer distributors a processor can ensure greater volume throughput for each of its distributors; this may mean greater commitment from distributors which can generate better customer relationships and greater willingness to share information. Limiting the number of alliance partners may therefore increase the operational efficiency of the joint enterprise while simultaneously increasing the satisfaction and commitment of alliance partners.

A major factor contributing to the success of outsourcing alliances is the willingness of partners to adopt a common vision. The business must be conducted as a joint enterprise with shared strategic vision and objectives (Brito, 2001; Fill and Visser, 2000; Reason, 1999). A common vision fosters joint learning and innovation, greater efficiency in the use of interrelated resources; supports the efficient conduct of interdependent activities; and increases the competency of all actors (Florén and Tell, 2004; Sadler-Smith et al., 2000; Håkansson et al., 1999). In effect, partner relationships must be based on commitment to increase the profits of all partners through adopting strategies that align with each partner’s objectives and that of the joint enterprise (Bititci et al., 2004; Cox, 1999b; Mattsson, 1989).

In order to achieve targeted outcomes partners must work together closely and cohesively (Brunetto and Farr-Wharton, 2007; Golann, 2006). Managers must clearly understand the dynamics of the social systems in the alliance and the ways in which authority and control work within relationships (O’Regan and Ghobadian, 2002; Cox, 1999b; Arndt, 1983). Managers need skills in conflict management, team building and relationship development (O’Regan and Ghobadian, 2002; Hailen et al., 1991). If the relationship is adversarial, productivity and other gains are unlikely to be achieved (Brunetto and Farr-Wharton, 2007; Spekman, 1988).

Past studies have identified several obstacles to establishing successful outsourcing alliances. These include fear that outsourcing could lead to loss of control or that, as a generalist, the distributor may not appreciate the complexities of handling the processor’s products (Lynch et al., 1994; Bardi and Tracey, 1991; Maltz, 1994). Frequent failures with

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collaborative ventures and inherent problems in sharing resources and coordinating strategies suggest that the structure and architecture of alliances need to be customised to the strategic intent of the joint enterprise (Mikkola, 2008; Powell, 1990; Evan and Olk, 1990).

In the SME sector, there is an additional conundrum. SMEs display strong entrepreneurial orientations, engaging in creative, unusual or novel solutions through trial and error rather than adopting a systematic process of inquiry and strategic planning (Stokes, 2000; Morris and Sexton, 1996). The responses of SMEs to business issues are influenced not only by structural and managerial constraints but also by the SME’s culture (Schindehutte et al., 2008; Wolff and Pett, 2006) which is often highly entrepreneurial.

Many of these barriers to outsourcing alliances can be attributed to relational factors. The most profound causes of failures in outsourcing alliances are unrealistic performance expectations, lack of commitment to shared goals, poor communications and a lack of trust between the partners (Brunetto and Farr-Wharton, 2007; Logan, 2000; Lambert et al., 1999). Trust, commitment and co-operation between alliance partners engender satisfaction with the relationship and create enduring alliances (Florén and Tell, 2004; Sadler-Smith et al., 2000; Håkansson et al., 1999). Trust, commitment and co-operation are often the outcome of clearly elucidating the strategic intent of the alliance, the alliance being successful in achieving these strategic intents and the partners readily sharing information that can be used to achieve the strategic intent of the joint enterprise (Brunetto and Farr-Wharton, 2007; Geyskens et al., 1998). Several past studies recommend the establishment of measurable and realistic goals and tracking performance against these indicators so that alliance partners can constantly monitor the alliance’s tangible outcomes (Rodriguez et al., 2006; Logan, 2000; Lambert et al., 1999).

Methodology The case study is based on detailed analysis of the dyadic relationship of a SME food processor and its exclusive national distributor to food service and independent grocery retail customers. A single case study limits the potential to generalise the findings. However, there is evidence that single case analysis using multiple techniques of inquiry and data validation is rigorous enough to examine the dyadic relationships in new strategic initiatives (Brannemo, 2006; Easton, 1998). Additionally, uniqueness such as the study context, product-market life cycle stage and market growth strategies mean that a single case is appropriate for this paper (Bhaskaran and Sukumaran, 2007). The research also explores a contemporary phenomenon in its real life context; a situation in which a single case is contended to be more informative than multiple cases (Rowley, 2002; Yin, 1994).

The information for the case study is based on a multi-method modes of inquiry incorporating exploratory discussions with the marketing manager of Z, a literature review, in-depth interviews with two senior managers in Z and Y using semi-structured questions (based on prior theory informing the questions) and unstructured probe questions, direct detailed observation of operations and activities in Z and Y, and a review of documents such as company brochures, company accounts and correspondence between Z and Y. In-depth interviews were conducted with the marketing managers and chief executives of both Y and Z.

The inquiry combined inductive and deductive approaches, prior theory informing the questions and new theory being inferred from probing the responses of the participants (Perry, 1998). Prior theory based on knowledge gained through the process

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of interaction in the exploratory discussions informed the case study development and critical review and deduction was the basis of the probe questions and observations (Perry, 1998; Parkhe, 1993; Eisenhardt, 1991, 1989). The issues probed included Z’s core competency, trends in Z’s market environment, motivations for targeting food service and independent grocery retail customers, reasons for pursuing a distribution outsourcing alliance rather than conducting this activity in-house, the criteria on which Y was identified and selected, and satisfaction with the alliance. With the managers of Y, we probed Y’s core competency, the motivations to introduce Z’s product range, trends in Y’s market environment, the way in which Z was identified and selected, and satisfaction with the alliance.

Because this is a single case study there are limitations to generalising the results and thus theory building. To overcome this limitation we adopted the positivist and embedded approach to establish analytic generalisation and thus support theory building. Analytic generalisation attempts to gather evidence that supports the theory without necessarily proving it definitively (Firestone, 1993). The positivist approach offers greater scope to manage issues such as validity, reliability, structuring data collection, analysis of data and generalisation and theory building (Rowley, 2002; Riege, 2003). The results were triangulated by comparing the findings obtained from Z with information obtained from Y and other sources such as archival records, field observations and the findings in extant studies.

Case study: review and discussions Company Z is a mid-sized seafood processor and marketer based in an Australian regional town. It is a wholly owned subsidiary of a large Japanese corporation. The parent company has seafood processing plants in South Vietnam, Thailand and Japan. Z’s competency is in processing value-added Japanese style seafood products so as to manufacture consumer products such as fish paste, seafood highlighter, seafood sticks, formed calamari rings, formed squid rings, seafood bites, seafood balls, fish cake, seafood parcels and crumbed fish fillets.

Z’s final customers are consumers of high value, ready-to-eat seafood products. From Z’s first commencing its Australian operations in 1988, it reached its customers through the major supermarket chains. Approximately, 85 per cent of Z’s current sales are to the two large supermarket chains, Coles and Woolworths, the remaining 15 per cent of production is sold to a few wholesalers throughout Australia.

Z’s decision to focus on the major supermarket chains and a few wholesalers was predicated by its strategy to build sales volume, optimise resource utilisation and generate economies of scale in production and marketing. In order to control sales and distribution costs Z only sells full pallet loads of products, an economic order size determined on the basis of computing the cost of consolidating and servicing orders. High transport and handling costs made it inefficient and unprofitable for Z to deliver less than full pallet loads. Because Z has about 27 stock-keeping units, the supermarkets are not saddled with high stock levels as individual stores, totalling about 1,500 stores, are able to purchase mixed pallet loads and consequently minimum order requirements do not constrain decisions to purchase. Supplying mixed carton lots based on historical sales trends also enabled Z to maintain high service levels while virtually eliminating losses from write-off of “out-of-date” or damaged stock. Therefore, notwithstanding the market domination and potential coercive power of the

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supermarkets, this arrangement was an effective way of Z reaching consumers all over Australia.

Y is a national distributor specialising in distributing to SMEs in the food service and grocery retail sectors. Y has a national network of warehousing, distribution and transport infrastructure, a large and experienced sales team with expertise in selling high value foods, and a long history in the high-value food distribution business. Y imports speciality frozen and chilled foods from more than 60 countries world-wide, consolidates orders for a variety of products from its customers and then supplies these orders within scheduled delivery lead times of about seven days. Because Y sells a mixed consignment of products from different suppliers to each outlet, Y has the capability to achieve transaction cost efficiencies even if individual stores only purchase one or two cartons of each supplier’s products.

From about the 1990s, Australia experienced significant growth in disposable incomes, unemployment decreased sharply, and many more Australian families became double income families. These trends superimposed in an environment characterised by increasing numbers of single households, attributable to an aging population and greater number of people electing to remain single, meant that many more Australian households were purchasing ready-to-cook meals. The changing demographic and food consumption trends influenced Z’s sales and business performance. Z’s sales progressively increased. From 1990 to 1998 Z recorded double digit growth with sales of more than $15 million in 1998. During this high growth phase Z continually and successfully expanded its product range. However, even during this peak sales phase Z was only operating at near full capacity, on a one shift 8.5 hour production cycle. There was therefore considerable scope to increase production and exploit economies of scale.

From 1998 to 2004 Z’s sales grew less rapidly and from 2005 sales progressively declined This was because Z experienced intense competition from low-cost imports from countries such as Vietnam and Thailand. Market liberalisation and reduced import duties, the strengthening of the Australian dollar and the free flow of information through the internet and therefore greater knowledge about sources of overseas supply meant that competition from overseas suppliers became more intense. Importers became more capable of efficiently servicing the two major supermarket chains. Customers were also seeking out and trialling a greater variety of the ready-to-cook meals that were now on offer in Australian supermarkets. Z saw these developments, not unique to Australia, as potential threats to its business.

Research in the UK indicates that when market share for a product in the supermarket segment reach 80 per cent (as is the case with Coles and Woolworths in Australia) incremental sales are difficult to achieve (Fearne and Hughes, 1999). According to Fearne and Hughes independently owned retail stores are better positioned to service the remaining 20 per cent of the market because they can customise services to the needs of this segment. This also appears to be the case in the Australian grocery retail market. Because of factors such as personalised and customised service and accessibility, about 15-20 per cent of retail sales for most foods are still conducted through independently owned neighbourhood stores. Notwithstanding the fact that Z’s new market development initiatives were not informed by evidence in other countries, the strategies seem logical and timely.

However, Z experienced unexpected difficulties in penetrating the food service and independent grocery retail markets. Under its present marketing model, Z sold full

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pallet loads to more than 1,500 stores belonging to the supermarket chains. The two supermarket chains accounted for about 90 per cent of the retail market for ready-to-cook foods. In contrast, most independent retail grocery stores and food service outlets could only purchase a few cartons per transaction. Thus, customers in these sectors did not have sufficient purchasing capacity for Z to service them directly.

If Z attempted to penetrate this market directly it would have needed to make substantial investments in a network of regional warehouses, transport and logistics infrastructure and sales personnel. Because warehousing, transport and logistics infrastructure are expensive and because Z did not have sufficient knowledge of this market, it was unlikely that Z could add value through conducting these functions in-house. Z could not outsource these services from different providers across Australia as it did not have the management and resource capabilities to handle several service providers. Z recognised that by outsourcing these functions to one vendor, it could access the vendor’s resources and competency and therefore add value through offering efficient customer service at competitive prices.

Z also recognised that the market insights and relationships of a specialist distributor could enable better understanding of the individualised demands of a wide variety (arising from factors such as size, business culture and whether part of a franchise or voluntary group) of new customers. Accurate and timely information about markets supports efficient planning and management of production, inventory, promotions and merchandising and this could potentially help Z achieve its objectives more efficiently. A strong relationship between Z and a sole distributor could lower operating costs, lower costs of replenishing stocks, create efficiencies in warehouse space utilisation, reduce inventory levels, reduce handling and management of damaged and out-of-date stocks, and increase efficiency in the use of transport facilities. These benefits are not unique to this alliance and have been amply documented in the findings of several past studies (Logan, 2000; Lambert et al., 1999; Lieb et al., 1993; Mattsson, 1989). Because Z has less experience and competency than Y in marketing to food service and independent grocery retail customers it seems logical that Z should outsource distribution functions to Y.

Because there is substantial alignment between the competencies and resources of Z and Y this alliance seems a logical development. Y’s experience, knowledge, warehousing and distribution network means that Z could sell even single carton lots to its customers, something beyond Z’s resource capabilities and competencies. Y’s existing strong customer base presented substantial opportunities for Z to increase its portfolio of customers. Because of low volumes per order and resulting diseconomies, Z could not efficiently meet the needs of SMEs in the food service and independent grocery retail market through merely investing in infrastructure and facilities. Z’s management team concluded that Z could piggyback on Y’s resource capabilities and competencies to access food service and independent grocery stores throughout Australia, markets that Z was could not cost efficiently service. The alliance with Y was therefore a logical strategy. It provided Z the opportunity to develop new markets and reduce Z’s dependence on the maturing supermarket segment while simultaneously providing Y with the opportunity to increase sales per transaction and therefore achieve transaction cost economies.

Notwithstanding the synergies in competencies and resource endowments, the alliance between Y and Z was a chanced outcome and was not the outcome of systematic and in-depth research and analysis of complementarities in the competency

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and culture of the two firms. In our opinion, a systematic evaluation of the complementarities and business culture of Y and Z and the development of a joint vision based on this knowledge would have resulted in a more effective alliance. However, as evident in a large number of studies, trial and error strategic initiatives and even opportunistic decision making are the reality in the SME sector particularly amongst low technology food processing and marketing enterprises. The response of Z and Y to business issues such as developing new markets, diversifying into new markets, accessing new sources of supply, the supply chain architecture that they developed and decisions to adopt an experimental alliance seems atypical of SMEs (Schindehutte et al., 2008; Wolff and Pett, 2006; Golann, 2006; Bhaskaran, 2006; Cante et al., 2004; Bence, 1995).

In 2003, Y contacted Z to ask whether it could distribute its products. Because of increasing operating costs Y was expanding its product portfolio in order to increase sales per transaction and increase scale economies and operating efficiencies. Y had assessed Z’s product range to be a good fit to its current product range. Y believed that Z’s products and brands enjoyed a premium positioning in major supermarkets. Y was also aware that Z, experiencing declining sales, had rationalised its marketing operations in 2002 through centralising these functions; an obvious opportunity. Z had discontinued the positions of state-level sales managers in Victoria, Queensland, New South Wales and South Australia. This rationalisation left Z with an Australian marketing team comprising the national sales manager and the business development manager. Coles and Woolworths had more than 400 stores in each state, more than 1,500 stores Australia-wide. Therefore, the state-level sales managers were critically important to Z’s marketing initiatives. Rationalisation of the marketing operations meant that the two-person marketing team now had to liaise with the head offices of the two supermarket chains and with key customer personnel in more than 1,500 stores throughout Australia. Z then began to experience difficulties in managing sales and marketing initiatives in the supermarkets and this started to adversely affect its sales. The decision to rationalise the marketing operations and thus reduce services to the supermarkets demonstrates Z’s belief that growth opportunities in this segment had matured.

The reduction in marketing resources meant that Z was not able to pursue market development unaided. Z did not have the expertise or resource capabilities to service efficiently the needs of the highly fragmented independent grocery retail and food service customers. Unlike Coles and Woolworths which use a centralised buying system, purchasing decisions in independent grocery retail and food service outlets are made by the manager’s on each outlet. Y had been supplying small-scale food service and grocery retailers for more than 50 years. Partly because of this long history, Z believed that Y had competencies relevant to dealing with numerous small-scale food service and independent grocery retail stores. Z believed that Y’s business model, market knowledge, customer relationships and structural capabilities were critical to its sales development strategy in this sector. Z’s management team believed that the appointment of Y as a sole distributor could lower distribution costs because of savings in costs of replenishing stocks, optimised warehouse space utilisation, reduced inventory levels, and reduced costs of handling damaged goods and returns. The decision to enter into a distribution outsourcing alliance with one partner therefore seems logical as it could potentially help Z overcome its resource constraints and

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generate transaction cost efficiencies. This position is supported by findings in many studies that alliances with fewer, larger, technically efficient and innovative partners are more effective than alliances with a multitude of partners (Min et al., 2005; Fearne and Hughes, 1999).

The alliance experienced major challenges. It was founded on assumptions about each partner’s benefits. Y anticipated efficiency gains through greater utilisation of its existing warehousing, transport, logistics and human resources. Y could only achieve operating efficiencies through increasing total sales, sale of products sourced from all its suppliers. There was no reason for Y to increase the sales of products from any one supplier. Greater commitment to Z’s products could only result from establishing a preferred supplier relationship with Z was and this may be detrimental to Y’s relationship with its other suppliers. A special relationship can be fostered through developing a common vision whereby supply chain partners pursue their activities as a joint enterprise (Florén and Tell, 2004; Sadler-Smith et al., 2000; Håkansson et al., 1999). The challenge is to identify the unique opportunities in the relationship between Z and Y, not merely, as is the case with most supplier-reseller relationships, targeting benefits that accrue from resource sharing and cost efficiencies.

Y and Z did not explore how their independent strategic objectives could be achieved through widening the scope of this engagement from that of a seller-reseller mode of engagement to a joint enterprise model. In order to do this, the partners would need to develop a business model that is different to what exists between Y and its other suppliers. Our discussions and observation of business practices suggest that the foci of Y and Z were only on issues pertaining to resource utilisation and cost efficiencies. The partners did not investigate the systems, structures and incentives that are needed to develop business, satisfy and retain customers, develop their competitive strengths and establish a sustainable long-term alliance.

Y agreed to enter into the alliance on a phased basis (state-by-state). The partners did not discuss how customers with branches in different states will be serviced in the interim. Z agreed to provide Y a 15 per cent discount on the sales price to offset sales and distribution expenses. The senior managers of Y and Z agreed to meet at three monthly intervals to review performance against targets and continually work on sales growth. The partners did not explore how to develop and retain new customers. The alliance was predicated by the belief that sales growth will be rapid because Y already had a large customer base and the alliance primarily entailed the introduction of a range of new products to Y’s existing customers. Y had recently established a distribution alliance with another supplier of chilled meat products. Within six months of finalising that arrangement, the supplier’s sales had increased by about 40 per cent. Based on this evidence, Y and Z assumed that the same business model can be replicated.

However, in the past one and a half years Z only achieved about 5 per cent growth in sales through its engagement with Y. Even though sales growth was substantially less than what was forecast, cost of sales (discounts offered to Y, administering the sales, providing samples and other promotional support) was much greater than what was forecast. Z and Y did not carefully analyse whether their expense and sales were realistic and what, if any, could be the implications of these targets not being achieved. Past studies reveal that unrealistic expectations and poor communication between partners tend to adversely affect trust and commitment to an alliance and account for the failure of many alliances (Rodriguez et al., 2006; Logan, 2000; Lambert et al., 1999).

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The senior managers of both Y and Z acknowledge that their discussions and negotiations should have been more far reaching and underpinned by a joint enterprise philosophy rather than focussing on sales development and cost savings. The relationship formation and strategies that Y and Z adopted are atypical of the nature and process of engagements in the SME sector, entrepreneurial and trial and error experimentations (Schindehutte et al., 2008; Wolff and Pett, 2006; Stokes, 2000; Morris and Sexton, 1996). Because Y and Z focused on achieving their short-term goals and entered into this alliance to overcome a compelling immediate problem, Z to arrest declining sales and Y to increase capacity utilisation and thus reduce operating expenses, the alliance did not focus on customer value creation. Disappointing sales and cost of sales results have created uncertainties regarding the benefit of the relationship. This appears to have diminished the partners’ trust and commitment to the venture.

The achievements within a few months of establishing the alliance reveals the scope and potential of this alliance. Y became a conduit for good quality market intelligence and speedy information on new product development opportunities. Within one year of establishing the alliance Z successfully introduced three new products to food service outlets, products developed by Z based on market intelligence provided by Y. The importance of supplier-reseller relationships in new product design and constant quality improvement is discussed in some studies focussing on the high technology and large business context (Lemke et al., 2003; Goffin et al., 2000; Monczka et al., 1995). Our review of extant studies suggests that knowledge sharing with the objective of creating customer value through new product development is not a priority in SME supply-chain engagements. This seems to be a unique capability that cannot be achieved by Z and Y working independently and therefore is a significantly important contribution of the alliance.

The findings in this paper reveal the importance of incorporating new product development opportunities as a performance indicator in SME supply chain engagements. The speed to market (the time between idea generation and commercialisation) was high when benchmarked against projects such as the UK Heritage beef project. The UK Heritage beef project took more than one and a half years from idea generation to product launch (Shaw and Gibbs, 1995). In the food marketing industry, profit margins are low and returns from new product introductions are dependent on first mover advantages, an advantage which often dissipates quickly because low barriers to entry encourage competitors to introduce “me too” products (Bhaskaran, 2006; Fearne and Hughes, 1999).

Constant innovation and rapid commercialisation is a critically important strategic capability in the food SME sector. In our opinion, the capacity to quickly disseminate market information and develop new products that match market needs is the unique competitive advantage of this alliance. Prior to this alliance Z experienced barriers in developing and introducing new products. New product introduction to supermarkets, Z’s core market, was a slow and demanding process. The supermarkets practice stringent procedures for evaluating new product proposals. New product are considered on their strength to generate additional sales and profits in the product category, refrigerated display space availability in stores and whether the new product could potentially cannibalise the sales of existing products. Contrastingly, food service outlets targeted by Y were constantly adopting novel products to interest their customers. Introducing new products to SMEs presented Z with the opportunity to pilot new products and then scale-up production of the successes and introduce these products to

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the independent grocery retail sector and potentially even to the supermarket chains. The alliance also presented Z the opportunity to manufacture under contract some products for Y which Y then marketed as its “private” labels to independent grocery retailers.

Therefore, within one year, the alliance was revealing a new and potentially profitable dimension. However, the alliance had not achieved targeted sales and profits and this unfortunately adversely affected the trust, commitment and relationship between the partners. The critical weakness of this alliance was the non-adoption of a common vision and the failure to develop a joint enterprise philosophy based on synergies that extended beyond immediate resource utilisation and cost efficiency imperatives. While more efficient use of resources and cost savings are important, the capacity of the partners to work together and speedily introduce differentiated offerings is perhaps the unique capability of this alliance.

Findings and conclusions The outsourcing alliance between Z and Y was predicated on beliefs regarding the unique and non-transferable competencies of the partners. Z had competency in producing high value Japanese-style seafood consumer goods. Y had competency in providing warehousing, transport, logistics and personal selling functions to customers that can purchase only small lots per transaction. Therefore, the alliance was driven by perceived mutual benefits. Z decided to outsource distribution services to new target markets to Y because it concluded that it did not have the knowledge, resource endowments, transaction cost efficiencies and customer relationships to add value to offerings targeted at customers in this new market. By outsourcing the distribution function, Z was implicitly making decisions on the ownership and control of particular resources so as to appropriate the maximum share of value through greater value-add to customers. The motivations for the outsourcing alliances between Z and Y, discussed above, are consistent with past studies’ findings (Min et al., 2005; Kurnia and Johnston, 2001; Karonis, 1997).

This engagement between Y and Z reveals many issues that may affect the success of distribution outsourcing alliances, particularly such engagements by SMEs operating in a low technology and highly competitive environment. SMEs tend to adopt a non-systematic and trial and error mode of decision making. Thus, unlike large companies alliances between SMEs tend to be opportunistic and are targeted to overcome immediate problems.

The alliance between Y and Z reveal many features that characterise business development strategies by SMEs. Z’s motivation for the alliance was the downturn in its existing markets, the imperative to develop new markets and its excess production capacity. Y’s motivation was to increase sales and thus increase the utilisation of its warehousing, transport, logistics and human resources and thus achieve scale economies. Because of this pre-eminent focus on increasing resource utilisation and achieving scale economies, the partners did not explore how the alliance could generate customer value creation, increase customer satisfaction and loyalty, and build a successful and sustainable joint enterprise. Additionally, the partners established unrealistic sales and expense targets. Lack of success in achieving these targets diminished the partners’ trust and commitment to the alliance. The alliance does not seem to have much potential and appears to be unsustainable.

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In our opinion the partners need to revisit the basis on which this relationship was founded. Z and Y should develop a common vision and create a business architecture that would enable them to strengthen their position in the market through creating value for their customers. Because of low barriers to market entry and low profit margins, differentiation through constant innovation and speed-to-market is critically important in marketing food products. The outsourcing alliance between Z and Y revealed significant capability in constant innovation and speed-to-market. Y’s competency in rapidly identifying market needs and Z’s competency in rapidly developing novel products to satisfy these needs are unique capabilities. Within one-and-a-half years of starting-up, the alliance successfully introduced three new products to food service customers. This is a significant achievement when benchmarked against successful new product introductions by other food supply chain alliances. Concurrently, Y also identified opportunities for Z to contract manufacturing private label products for independent grocery retail stores. These are new business opportunities, opportunities that Z had not previously identified.

In order to capture these opportunities fully, the alliance has to adopt a common vision and mission. This would entail substantial re-engineering of the business philosophy, culture and systems by both Z and Y. Z and Y would have to adopt a business model based on shared values. This could have implications on Y’s relationships with other suppliers as it may have to model its relationship with Z differently to that with other suppliers. These initiatives would also call for systematic research, evaluation and development of business architecture and protocols. Past studies on SMEs suggest that introducing such changes could be a major challenge. SMEs tend to adopt an entrepreneurial approach to business development and may therefore not have appropriate skills in conflict management, team building and relationship development; critical skills in pursuing an alliance with a common vision and mission.

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About the authors Suku Bhaskaran is the Director of the Food Marketing Research Unit, a research, consultancy and training services centre in Victoria University, Australia. He is an Associate Professor, has a successful track record in tendering for and completing nationally competitive research grants and contract research projects for food companies. He is published widely in refereed journals such as the Journal of Small Business Management, Cross Cultural Management – An International Journal, Journal of Consumer Marketing, Marketing Intelligence & Planning, and The British Food Journal. Suku Bhaskaran is the corresponding author and can be contacted at: [email protected]

Helen Jenkins was the Business Development Manager of Austrimi Foods. She is currently the Executive Officer of the Australian Prawn Farmers Association.

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