The Importance Of Collaborative Relationship For A Company: Case Of Tesco
Facing fierce competition in food retail industry, retailers are likely to focus mainly on the cost objective in its supply chain as buying price represents a high proportion of total cost. As a result, we commonly notice the price war among retailers where suppliers are unfairly treated because of the buying power. Buyers, who tend to be more powerful, impose predominant competitive activities, such as putting stress on suppliers for cost reduction, thus bringing negative impacts on the relationships.
However, theories suggest that a collaborative relationship will improve performance and achieve higher profitability. Nyaga et al. (2009) proposed that trust and commitment which are two key elements in a collaborative relationship, will generate improved satisfaction and performance. Johnsen (2009) also suggests that creating trustful relationship and collaborative activities with suppliers can encourage innovations that potentially benefits the customers. Similarly, Henke et al. (2010) recommends a company to strengthen relationships with suppliers to optimize the opportunity of innovation and create a win-win relation. Beneficial collaborative relationships have been well-acknowledged in automotive industry which seems more predictable and mature. For example, Toyota successfully reaps the benefits of generating innovation while cutting the cost from their suppliers by building strong collaborative customer/supplier relationships. The relationship here is highly associated with Toyota’s collaborative activities; Toyota shares their work experiences, offer hands-on training, involves its suppliers for product development as well as decision makings. Within these interactions, Toyota builds trust and commitment in supplier relationships so as to bring out the most efficient performance and innovation from suppliers.
Automotive industry is not alone. Such innovative example can be found in a retail industry as well. Unilever, who is in close collaboration with their packaging suppliers, MuCell and ALPLA, jointly created new technology on reducing plastic on their product bottles. This innovation brought sustainability as well as reputation into Unilever’s business. Recently, we also notice there are some retail companies starting to perceive the importance of a good supplier relationship to their business. Aldi announced to shorten the payment terms to 14 days for their suppliers to ease their cost pressure. SuperValu 4 offered financial support to vegetable suppliers when the weather brought impact on outputs. Companies are using their power effectively and supporting suppliers in exchange for a close relationship as a reward. Industry Analysis and Practice- Safeway UKBuilding a collaborative relationship is to create a network of mutual dependencies which have been generally regarded as less powerful behaviors, whereas Kumar (2005) argues that such dependent network makes one more powerful as it contributes to higher trust and commitment. This theory can be illustrated in the report of Shaw and Gibbs (1995). Shaw and Gibbs use the case study of ‘Heritage beef’ in Safeway stores, one of the largest retail corporate chains in the UK, to examine the nature of relationship between retailer and supplier. When digging into this case, we figure collaborative activities between retailer and supplier generate a strong, close network and successfully lead to a mutual goal (profitability) for all parties.
The Heritage beef concept is to offer consumers a premium level of beef taste over the standard beef ranges. When this new idea is introduced, Safeway invited its beef supplier Sims Food group for further discussion and planning. With Sims’ close relationship with farmers and processors, sourcing supplies of consistent quality and stability becomes feasible. In return, Safeway commits to its exclusivity, offers attractive spot on the shelves and promotes the product effectively.
On the other side, Sims also acts as a buyer when it comes to buying cattle from farmers; Sims shares information on markets and trading conditions with farmers, offers flexibility when farmers atypically demanded special cattle handling process. Sims establishes its credibility as a reliable company to work with. Farmers, act as suppliers of cattle, can gain more profits if they trade via auction markets; however, they look for customers’ support when there is time of declining prices or excess supply. To obtain such security, farmers are willing to trade with Sims and offer great quality cattle in dead-weight basis. Among these three parties, we observe collaborative activities, such as joint process of product development and planning, information sharing, improved competitiveness of cost and quality, that bond all parties tightly. Consequently, a collaborative relationship is formed and its close network enhances the performance for their trust to one another and their consensus of sharing all the risk and rewards together.
Theory Application and Practice
Tesco
Tesco, one of the giant retailers in the UK, is known for its slogan ‘Every Little Helps’ and this customer-oriented strategy led to its triumph of rising share market. Yet in order to compete with other aggressive retailers, Tesco reinforces its traditional price-driven buying practice. Unfortunately, the tactics Tesco are using have been described nothing more but bullying its suppliers since Tesco put pressure on suppliers for cost reduction and delayed the payment to suppliers so as to manipulate a profitable report.
However, there is still no obvious evidence showing Tesco’s effort of improving its notoriety. Early this year when customers were complaining about the empty shelves for British beef in Tesco’s stores, Tesco argued they were sourcing a better quality beef from Ireland for customers. Tesco’s statement had soon been proved as a lie when several meat processors advised they never had any problems with the quality or availability of British beef, along with a price report which indicated Ireland’s beef was cheaper than British’s. Tesco disrespected British farmers by trying to point the finger on the quality of British product instead of admitting their ‘cheapest first’ buying policy. This sounds especially sarcastic if people find a news back in 2013 when Tesco made an announcement of pledging to purchase more local (UK) produce. Tesco’s spokesperson once mentioned: 'Suppliers are at the heart of our business and we’ve been working collaboratively with them to change the way in which we work together. ' regardless suppliers voted Tesco as the worst retailer. Few months ago, Tesco announced its alliance with Carrefour and it had been outlined as a joint power that is going to squeeze suppliers for cutting down the prices.
Tesco’s buying practice is focusing narrowly on the cost yet Lee (2004) warned that If a company provides low cost alone, it is unsustainable because it lacks the ability to respond to unexpected changes. Therefore, the potential risk of fatal failure is high. The paucity of loyalty can potentially become another threat since customers can always find alternatives in cheaper prices. If a company cannot provide its products with adding value, it is likely to lose its customers easily. As a result, a company who mainly focus on low cost can hardly run a long-term business.
Recommendations
To achieve success among competitions in sustainable way, key is how well a company can manage its supply chain as a whole and it all relies on collaborative relationships established by building trust between buyers and suppliers. Without a good relationship, achieving effectiveness in a supply chain is unattainable.
Due to the unbalanced power, suppliers who seems relatively less powerful in a relationship, will not take their first step to any alliance or project involvement without trust. Johnston et al. (2004) also proposed that the nature of trust is complex; trust is a pre-condition as well as an outcome of relationship development. There is little possibility to create collaborative relationship without trust. The suggested first step Tesco has to take is to put efforts on gaining trust from suppliers whom they misbehave. Tesco should start to treat their suppliers fairly by settling the payment on time, which is a basic method to show the respect to their suppliers and send a message of Tesco’s transformation of becoming a reliable company to work with. Just like Kumar et al. (1995) proposed that the trust can still be observed in asymmetrical relationships as long as the more powerful party behaves fairly to the vulnerable parties.
The report of Johnston et al (2004) and Henke et al (2010) indicate the positive correlation between collaborative activities and trust. Taking the great example from Safeway, Tesco can share market information to suppliers for helping them manage the plan in supply. At the same time, instead of merely asking for cost reduction, Tesco should meet suppliers face to face and discuss about any difficulties its suppliers are encountering or what supports are expected in terms of maintenance to cost and quality. Having this open communication followed by managing a long-term contract, Tesco will promise its support to suppliers in exchange for suppliers’ trust and improved performance. This contract should be regarded as mutual commitment of sharing risk and rewards without any coercion involved. Step by step Tesco will nurture the trust of suppliers. With trust suppliers will gradually dedicate their involvements with Tesco, so a collaborative relationship can be formed.
