Procuring Sustainable Competitive Advantage

Organizations seek competitive advantage through the use of resources at their disposal. These resources allow them to exploit opportunities or neutralize threats to achieve superior long-term performance. Procurement professionals are starting to recognize that by establishing appropriate external relationships, their organizations can tap into resources beyond their own four walls and even find synergies and create new complementary resources. This requires them to lead the entire supply chain and to transform the strategic contribution of procurement.

As synergies with other organizations across the supply chain are exploited, competitive advantage becomes network based. This involves agreeing goals, investing in relationships, sharing resources, finding complementarities and establishing effective forms of governance. These activities require leaders who are able to give a sense of purpose to the entire supply chain.

Supply chain leadership is the process by which an individual can influence a network of organizations to achieve common goals. Like a skilful conductor, a supply chain leader can create harmony out of a collection of individuals and organizations and ultimately achieve competitive advantage by finding and exploiting resources which are valuable (i.e. they can make the organization more efficient and effective), rare (i.e. they are not possessed by large numbers of organizations) and appropriable (i.e. organizations that do not possess the resources cannot obtain them).

Figure 1 depicts how both Organizational (internal) and Supply Chain (external) resources can lead to competitive advantage when an organization is implementing a value creating strategy that is not simultaneously being implemented by any current or potential competitors. Exploiting those resources that are difficult to imitate, transfer or substitute can sustain the competitive advantage into the future.

Supply chain leaders can have an impact on organizational resources, but their most significant contribution to competitive advantage is through external sources across the supply chain. These include scarce natural resources, new technologies, talent and innovation potential. Supply chain leaders can stimulate the development of such resources in four different ways:

1. Invest in Relationships: collaborating with suppliers and investing in relationship-specific assets, such as new facilities or equipment, which can lead to competitive advantage. This can be done by providing safeguards and volume commitments that give suppliers the confidence to invest in those assets. For instance, Apple is known for investing heavily in equipment and tooling at suppliers, as well as sending teams of engineers and process improvement specialists to help suppliers resolve production problems and improve quality. These investments reassure suppliers of their commitment and encourage them to invest in resources and capabilities for the future.

2. Share Knowledge: The ability to innovate through co-creation of products and services with suppliers is a key to competitiveness. By investing in knowledge sharing activities, aligning incentives to encourage transparency and reciprocity, and discouraging free riding, organizations can tap into this innovation potential. Increasing outsourcing of knowledge intensive services such as R&D, legal, IT, accountancy and even procurement, calls for a more systematic approach to sharing knowledge. When BP outsourced its IT operation to a group of major players including Wipro, IBM, HP, Tata and Infosys, they described themselves as being at the Captain’s table, ensuring that collaboration was taking place across the network of partners and that knowledge and innovation were flowing.

3. Find complementarity: Organizations can also create competitive advantage with their suppliers by leveraging on complementary resources. Complementarity means that two or more organizations can achieve something together that they could not achieve on their own. This requires identifying suppliers with potentially complementary resources (through supplier selection) and exploiting those resources by aligning systems, processes and cultures (through supplier development and relationship management).
A good example of two organizations benefiting from complementary resources is the relationship between British Airways (BA) and DHL. In 2009, BA approached DHL for the supply of in-flight catering for short-haul flights because it valued its logistics expertise and its capabilities for timeliness, efficiency and security across the supply chain. DHL saw this as an opportunity to enter the airline-catering sector and decided to invest in both infrastructure and capabilities. This has allowed DHL to expand the business and offer their catering services to other airlines.

4. Establish effective governance: This is the ability to choose governance structures that reduce transaction costs and also mitigate the risks in the supply chain. It can be achieved either through contracts or self-enforcing agreements that rely on trust and goodwill. The key is to align relationships with governance structures, which balance contracts and interpersonal relationships. Initiatives such as Vendor Managed Inventory (VMI) and Collaborative Planning, Forecasting and Replenishment (CPFR) are good examples of joint efforts to balance contractual and relational forms of governance.

To develop a competitive advantage that is truly sustainable, organizations not only need to identify and tap into valuable resources across the supply chain but also to do it in a way that is difficult for competing chains to imitate, substitute or appropriate. This can be done by working with suppliers across the entire chain, protecting knowledge, safeguarding exclusivity and ensuring that the company is a customer of choice for key suppliers.

This is an extract from an article that originally appeared in the October 2014 edition of Supply Management. View the original article here: http://www.supplybusiness.com/analysis/skilful-conductor/

In their new book Leading Procurement Strategy, Carlos Mena, Remko van Hoek and Martin Christopher discuss how leaders in procurement can take charge of the supply chain, articulate a strategy and embrace a transformational role to drive value through the supply chain.