Financial Contributions of Sector Procurement Collaboratives

Introduction: Efficiency and Customer Service in Procurement Collaboratives

The paradoxical nature of strategic sourcing, consortia-based procurement exchanges, and Sector Procurement Collaboratives is that, from the standpoint of efficiency, these buying consortia must strive to continually reduce costs and suppliers, yet on the other hand must remain flexible enough to respond to the needs of the customers they serve. In other words, a balance must be achieved between efficiency and customer service. There are various ways in which to accomplish this, as indicated by the literature.

From the customer service viewpoint, supply chain relationships have a significant effect upon both the perceived and actual effectiveness of collaborations. Generally, these relationships manifest themselves in the phenomena of trust and commitment, both of which entail elements of efficiency and customer service. Indeed, Kwon and Suh (2004, p. 5) suggest that supply chain performance is directly related to the level of trust and commitment among partners along the supply chain.

Inherent in these relationships is effective information sharing, which in turn heavily relies upon trust. The type of information to be shared will be dictated not only by supply chain necessity, but also by the level of trust and commitment shared by supply chain partners. Only through collaboration can commitment and trust produce an optimal relationship among all partners within the supply chain.

A lack of trust leads to a lack of efficiency, velocity, and cost-effectiveness within the supply chain, where scrutiny and verification must be increased to fill the gap created by this deficiency. The cornerstones of supply chain goals — namely efficiency and effectiveness — will be compromised if a significant amount of trust is lost. In addition, inventory management, cross-docking, collaborative forecasting, planning, and replenishment will also suffer.

It follows that shared knowledge, grounded in both trust and commitment, leads to sufficient Sector Procurement Collaborative agility, as suggested by studies (Hazlett, McAdam, & Beggs, 2008). Maturation plays an important role in this regard, as mature relationships and the history of extensive collaboration in the supply chain tend to lead to a higher level of trust (ELSamen, Chakraborty, & Frankwick, 2006). The literature therefore offers considerable evidence for the positive results to be gained from cross-functional teams, collaborative teams encompassing suppliers, and broader strategic sourcing initiatives delivering efficiency gains (Anderson & Katz, 1998; Talluri & Narasimhan, 2004).

On the other hand, there is a noteworthy lack of critical reflection upon the cumulative effects of knowledge sharing on transaction velocities and accuracy over time. The measurable performance gains of advanced supply chain strategies such as Vendor Managed Inventory (VMI) and Collaborative Planning, Forecasting & Replenishment (CPFR) (Huber, Sweeney, & Smyth, 2004) nonetheless do not provide insight into increasing the agility of supply chains, nor into how challenges such as significant fluctuations in supplier quality levels, sourcing capacity, and pricing variations can be managed. Instead, empirical studies tend to link such advanced strategies to increased efficiency and financial results, as well as to how consortia exchanges and Sector Procurement Collaboratives capitalize on process maturity to deliver higher levels of inter-process accuracy and efficiency over time.

In order to achieve a closer focus on this research need, closer attention will be paid to causation within the various phenomena that guide the supply chain management process. In other words, the causal factors behind phenomena such as commitment, satisfaction, and superior performance — as well as their correlation with one another and with the rest of the supply chain — will be the focus of investigation (Dant, Brown, & Bagozzi, 2007, p. 2).

At the same time, it is also important to investigate the negative effects of certain phenomena within the supply chain, which also have causal bases (Dant, Brown, & Bagozzi, 2007, p. 2). Trust, commitment, satisfaction, and heightened performance can thus be contrasted with opportunism and dysfunctional conflict within the non-functioning supply chain relationship. By eliminating such negative factors, a correlative positive effect and increase of desirable factors is expected to occur, and supply chain efficiency will improve.

The purpose of this research study focuses upon two main contentions: first, that the efficiency of Sector Procurement Collaboratives correlates highly with inter-process maturity and transaction velocity; and second, that the catalysts of inter-process maturity and transaction velocity are more dependent on accumulated trust and transparency (ELSamen, Chakraborty, & Frankwick, 2006) than on aggressive price and supplier reduction strategies (Devine, Dugan, Semaca, & Speicher, 2001). In order to substantiate these contentions, the study intends to measure the contributory effects of inter-process accuracy and efficiency on the financial performance of a Sector Procurement Collaborative over time.

Hypotheses

The hypotheses for the study emerge from the basic contentions mentioned above and from the research questions the study seeks to address. The study focuses upon the levels of knowledge sharing and collaboration with and between suppliers, which are hypothesized to affect the probability of higher order accuracy and velocity, and the ultimate level of lean procurement workflows and lower costs resulting from this.

The first research question addresses the correlation of knowledge sharing (Dyer & Nobeoka, 2000) and the potential trust it creates (ELSamen, Chakraborty, & Frankwick, 2006), researched from the supplier cross-collaboration viewpoint. From this, the first hypothesis is that there is a high correlation between supply chain relationship factors — such as knowledge sharing, trust, and commitment — and supply chain effects such as cost-effectiveness and procurement velocity.

Within this framework, more specific elements of trust, such as joint relationship effort and its effect upon mutual trust (Nyaga, Whipple, & Lynch, 2009, p. 109), can be investigated. Significantly, joint relationship effort results in a higher level of trust on the part of both buyer and supplier in the collaborative supply chain relationship. The authors make the point that joint effort is seen as operationally focused, thereby creating an environment within which all parties can demonstrate their commitment to better operational efficiency.

Sector Procurement relationships and trust are generally built up over the long term, which requires consistency from all parties involved. Hence, both relatively short-term elements such as joint relationship effort and more long-term trust elements such as effective communication and knowledge sharing need to be applied in a consistent manner in order to provide a sound foundation of transaction velocity and process efficiency.

The second hypothesis is considered in conjunction with the first and addresses the issue of communication: both inter- and intra-supplier communication influence the balance among supply chain elements, providing a sound basis of transaction velocity while strengthening consistency and predictability. The hypothesis suggests that effective knowledge sharing and communication within and among supply chain relationships will positively affect desirable supply chain elements while minimizing undesirable ones. Strong links among trust and communication will therefore be likely to increase efficiency and velocity within the supply chain and its operations.

Biehl, Cook, and Johnston (2006, p. 27), for example, suggest that a match between communication mode and product customization within the supply chain correlates positively with the efficiency of joint decision making, particularly in contexts characterized by a high volume of routine and non-routine decisions.

Learning and knowledge creation are also important factors within the supply chain relationship. Long-term relationships, along with the communication and trust modes inherent in them, lead to a process not only of knowledge sharing but also of learning and knowledge creation. The third hypothesis is therefore that healthy, long-term relationships — where the elements of communication, trust, and commitment are present — result in a process of learning and knowledge creation that would not have been possible without the collaboration of all parties involved (Dyer & Nobeoka, 2000). The relative level of maturity within the supplier relationship is hypothesized to result in higher levels of collaboration over time. This increased collaboration in turn leads to the creation of synchronization across a multi-supplier federation. Furthermore, knowledge is not only shared and learned, but also created from this sharing and learning process, making the supply chain more efficient overall.

Johnston et al. (2003, p. 23), for example, suggest that differentiation is one of the effects of this learning and knowledge creation process. This is directly related to the functioning of the supply chain as a whole. Without effective functioning across the supply chain, product differentiation cannot occur effectively and the competitive edge of the company involved is lost. This relates directly back to the initial element under investigation: trust. Trust leads to communication sharing, in turn creating a long-term relationship whose ultimate result is both learning and knowledge creation. From this level of maturity, the supply chain can generate a truly competitive edge.

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