Introduction
Modern global commodity chain (GCC) and logistics are characterized by a multitude of geographically scattered economic actors and outsourcing of the production function to low-cost countries by large multinational enterprises (MNEs). These generalized trends have roused the development of two analytical frameworks for interpreting these complex linkages and dynamics of coordination: demand-driven and buyer-driven GCCs. These models consider power relations among actors with conflicting interests in a global supply chain and macro-economic factors influencing them. This essay explores the dynamics of buyer-driven and demand-driven GCCs and the institutional power shaping them drawing on evidence from the FFVs, cocoa, and fast-fashion industries.
Key Analytical Categories
A fundamental characteristic of global economic restructuring in the era of globalization is the increasing outsourcing of non-core functions such as production to low-cost economies by MNEs. The goal is to achieve a favorable cost position and acquire differentiation advantages through sustainable and efficient production (Christopher, 2011). Existing conceptual frameworks for understanding the geographical dispersion of supply chains are the basis for the GCC/VGC/GPN analytical categories.
The GCC methodology is useful for understanding how the supply chains of a specific commodity are organized. The GCC analytical framework focuses on the inter-organizational networks and actors in a single product value chain and inter-linkages amongst households, enterprises, and states (Kano and Verbeke, 2019). The aim is to determine power relations between firms and map the geography of labor flows to understand differential access to markets and resources. In contrast, the GVC analytical category gives a meta-analysis of interconnected processes and operations from production to distribution and consumption of products on a global level (Gereffi and Fernandez-Stark, 2016). It is premised on six analytic dimensions that explain local and national integration of economies into GVCs. The international aspects include the input-output structure of interconnected value-added activities, the geographical scope of offshored activities, and a governance structure that operationalize the power relations within the supply chain (SC) (Gereffi and Fernandez-Stark, 2016). The local facets of analysis are upgrading, a socioeconomic context of the SC, and domestic industry actors.
The GPN framework depicts the intra- and inter-organizational linkages and their spatial configurations. Therefore, the GPN analytic perspective focuses on R&D, design, manufacturing, and promotional networks as well as corporate, institutional, and collective power distribution within the chain (Henderson et al., 2002). It is also used to characterize the labor and value-adding processes and state and non-state actors influencing strategy. The impact of these factors on technological upgrading and the socio-economic development of different societies and groups is also considered in this framework.
Buyer-driven GVC
The GVC governance structure is premised on how power is exercised. Differential level of control by buyers influences global suppliers in complex commodity chains. In the context of GVC, the buyer-driven governance typology denotes industries ruled by lead firms, giant retailers, and branded companies (Kano and Verbeke, 2019). In their sourcing approach, these actors establish decentralized production networks in low-cost territories to cut costs. This trade-led approach to commodity chains is often adopted in labor-intensive, consumer-goods industries, such as retail (Gereffi, 2001). In this case, the production function is outsourced to tiered networks in developing countries. The large retailers prescribe the specifications those offshore factories must adhere to in producing finished products for foreign consumers (Kano and Verbeke, 2019). Therefore, they exert vertical control on production, export/processing, logistics, and marketing.
The economic power wielded by a GVC actor determines its level of influence on commodity supply chains. A buyer within the GVC framework is a major retailer or branded marketer that controls global sourcing networks located in Third World economies (Jacoby, 2009). These corporations often act opportunistically to pressure suppliers to reduce costs. As a result, independent factories are likely to settle on suboptimal choices that may lead to lower financial outcomes and lead to low wages for workers (Mezzadri, 2008). Thus, such networks are characterized by power asymmetry with the retailers controlling the production activities of the supplier.
A buyer-driven chain is manifested in the way large firms interact with their suppliers and the power exerted on them. Immense oligopsonistic control may arise when suppliers are more than retailers are (Jacoby, 2009). Therefore, power asymmetry in supplier-retailer relations and significant gaps between manufacturing and retail prices are some hallmarks of a buyer-driven chain. The evidence to look for varies between industries. In agro-food chains, higher profit earnings by firms or exporters downstream of the farmers than would be possible in a competitive environment indicate a buyer-driven governance structure (Vorley, 2003). In contrast, in the retail industry, supermarkets may require suppliers to adopt similar logistic systems or pass processing and barcoding costs to them.
Demand-driven Supply Chain
SC management aims to build a competitive supply chain that matches demand with supply. In this regard, being demand-driven means establishing SCs that are consumer-oriented or responsive to demand signals (Mangan, 2011). Such supply chains are agile and market-sensitive to maintain optimal inventory and expedite orders. Enhanced cooperation and partnership between firms and suppliers are necessary for real-time information flows in demand-driven supply chains.
Reducing logistical lead-time can lead to enhanced visibility of demand. For Christopher (2011), demand refers to reduced supply lead times and reliability through just-in-time strategies. He distinguishes two forms of this concept. Demand can be real – present in the marketplace – or derived in which case it is dependent on information flow from actors upstream the firm (Christopher, 2011). Firms must increase the visibility of real demand to ensure optimum inventory levels.
Being demand-driven means operating at strategic service levels at reduced costs, optimal inventory, and less reliance on forecasts. It requires a firm to rely on real demand in the marketplace to drive stock replenishment in the right volumes and minimize bullwhip effects on the network (Selwyn, 2008). However, most supply chains, including manufacturing, retail, and fast-moving consumer goods rarely use this approach. Instead, they employ enterprise-planning software to forecast demand. As a result, inordinate quantities of goods are sourced before being delivered to places with low demand. Nonetheless, forecast-driven demand is still important in some supply chains that need event management, for example, tourism.
Differences between the Concepts
The construct of buyer-driven SC reflects the sourcing approach of large retailers/firms that entails complex logistics and networks with suppliers. In contrast, a demand-driven SC is one that is sensitive to real demand in the marketplace (Samson, 1970). Therefore, the buyer-driven concept applies to the coordination of buying activities with upstream SC actors, while demand-driven SC centers on downstream logistics and information flow from customers to meet demand at a lower cost.
Institutional Power
The GPN framework highlights the influence of state and non-state actors on the supply chains. They include global, state, and regional/local organizations within GPNs. Institutional power is the control and influence exerted by national or international agencies, the Bretton Woods institutions, and global credit reference bureaus on lead firms and actors within GPNs (Bair, 2008). This authority is asymmetric and differs between these entities.
Different institutions exercise variable levels of control within GPNs. The most relevant forms of institutional influence addressed in class include the oligopsonistic power that is exerted by supermarkets on suppliers and the strong protection and regulation of upstream cocoa supply chain by cocoa-producing states of Ivory Coast and Ghana. Toyota consolidated its supply chains through lean production that delights clients while ensuring lower costs than competitors (Cox, 1999). As a result, the car assembler has acquired considerable supply chain power that it can use against buyers and market rivals. Understanding power relations within global SCs is important, as they impact companies directly and indirectly. For example, Asian nation-states, especially China, have had a huge influence on private firms in their agenda of achieving greater industrialization (Ngai and Chan, 2012). On the other hand, the power of international and Bretton Woods institutions on socioeconomic policies is significant through advisory and intervention. Therefore, understanding how these entities exercise their influence and control is crucial, as they affect upstream and downstream supply chain operations.
Analytical Categories Applied to Global Supply Chains
The GCC/GVC/GPN concepts highlight how MNEs can create value by developing strategic partnerships with suppliers and original equipment manufacturers across different countries. These governance structures are reflected in the global sourcing for fresh fruits and vegetables (FFVs), cocoa, and fast fashion.
The GCC framework is useful for the analysis of the FFVs industry. Large retailers in the EU influence the organization of the production and post-harvest processing of imported African FFVs. They prescribe the “cost, quality, delivery, product variety, innovation, and food safety systems”, limiting the processors accessing the market (Dolan and Humphrey, 2000, p.156). These processes entail high-level coordination of activities and the creation of inter-firm networks. The GVC governance perspective focuses the analytical attention on particular value chains. Thus, it centers on dyadic ties and inter-firm coordination between a firm and its suppliers in industries such as fast fashion (Bair, 2008). Apparel retailers select low-cost locations that ensure the best SC configurations. Their global sourcing strategies also consider contractual sustainable practices by the supplier’s factories (Dallas, Ponte, and Sturgeon, 2019). The GVC dimension of the input-output structure is reflected in the cocoa industry. Farmers dominate production, while agents or cooperatives conduct marketing. MNEs and retailers concentrate on processing nodes of the value chain (grinding and chocolate manufacturing) and sales.
Buyer-drivenness in FFVs, Cocoa, and Fast-fashion
Buyer-driven governance can be seen in how large retailers use their buying power to achieve a lower unit price of imports. In the context of FFVs, the high gap between production and retail price of a banana split imported from Ecuador or fresh African vegetables entering the EU reflects the buyer-driving nature of the supply chain. Supermarket concentration in the UK also gives top retailers – ASDA and Tesco – significant market power over pricing (Burt and Sparks, 2003). They use supermarket-own labels, deploy traceability systems, eliminate wholesalers, and impose upstream standards of processing as tools of governance. In the cocoa industry, chocolate manufacturers exercise the highest power in the value chain, while female workers in plantations in Ghana and Ivory Coast have the least (Barrientos, 2014). The producers use branding, continuous product development, mergers and acquisitions, outsourcing of grinding, and distribution as tools of SC governance. In fast fashion, retailers fabricate a climate of scarcity, provide budget products and use differentiation to control this market.
Demand-driven Management
Acquiring competitive advantages in FFVs, cocoa, and fast-fashion markets requires demand responsiveness and supply chain agility. In the context of FFVs, demand-driven management implies streamlining the entire supply chain to ensure speedy processing of large orders to meet demand. For example, supermarkets such as Tesco, have adopted advanced logistic systems that their suppliers (African FFVs processors and exporters) must also use to support a just-in-time (JIT) supply (Dolan and Humphrey, 2000). In the cocoa value chain, partnerships between grinders and chocolate manufacturers ensure JIT’s delivery of intermediate products to the latter. Firms such as Nestle form strategic partnerships with grinders like Cargill to streamline logistics and industrial processing. Demand-driven management in the fast-fashion market involves different strategies. Top brands, for example, Zara, have short product life cycles, twenty seasons rather than two, low-batch production and supply, and lower lead times (Tokatli, 2008). Although all three industries are demand-driven, fast fashion is highly sensitive to the market compared to the other two.
Institutional Power
Lead companies tend to exercise control of the supply chain through vertical networks and coordination. In the FFVs industry, retailers exercise oligopsonistic power towards suppliers and oligopolistic control over consumers due to the occurrence of a few major players (Fold and Neilson, 2016). The production component of the FFVs chains, for example, the Senegalese French chain, is under the tight control of UK supermarkets. They adopt vertical coordination and sometimes integrate with African producers or establish estates to meet stringent European standards.
In contrast, upstream regulation by the state in Ghana and Ivory Coast through national marketing boards protects producers/farmers at the base of the supply chain. On the other hand, downstream power relations amongst grinders and chocolate manufacturers are balanced (Mangan, 2011). The liberalization of the apparel industry by states increased the bargaining power of fast-fashion retailers over suppliers – sourcing freedom. Additionally, a fabricated climate of scarcity and increasing demand for cheaper, differentiated products have allowed top brands, for example, Zara, to consolidate their markets. Therefore, the state, global and local institutions have shaped global supply chains through increased vertical integration, marketing boards, and liberalization.
Reference List
Bair, J., 2008. Analysing global economic organization: embedded networks and global chains compared. Economy and Society, [e-journal] 37(3), pp. 339-364. Web.
Barrientos, S., 2014. Gendered global production networks: analysis of cocoa-chocolate sourcing. Regional Studies, [e-journal] 48(5), pp. 791-803. Web.
Burt, S. and Sparks, L., 2003. Power and competition in the UK retail grocery market. British Journal of Management, [e-journal] 14, pp. 237-254. Web.
Christopher, M., 2011. Logistics and supply chain management. 4th ed. Upper Saddle River: Pearson Education Limited.
Cox, A., 1999. Power, value and supply chain management. Supply Chain Management: An International Journal, [e-journal] 4(4), pp. 167-175. Web.
Dallas, M., Ponte, S. and Sturgeon, T. 2019. Power in global value chains. Review of International Political Economy, [e-journal] 26(4), pp. 666-694. Web.
Dolan, C. and Humphrey, J., 2000. Governance and trade in fresh vegetables: the impact of UK supermarkets on the African horticulture industry. The Journal of Development Studies, [e-journal] 37(2), pp. 147-176. Web.
Fold, N. and Neilson, J., 2016. Sustaining supplies in smallholder-dominated value chains. In: M. Squicciarini and J. Swinnen, eds. 2016. The economies of chocolate. New York: Oxford University Press. pp. 195-208.
Gereffi, G., 2001. Shifting governance structures in global commodity chains, with special reference to the internet. The American Behavioral Scientist, [e-journal] 44(10), pp. 1616-1637. Web.
Gereffi, G. and Fernandez-Stark, K., 2016. Global value chain analysis: a primer. 2nd ed. Durham: Duke University’s Center on Globalization, Governance & Competitiveness.
Henderson, J., Dicken, P., Hess, M., Coe, N. and Yeung, H., 2002. Global production networks and the analysis of economic development. Review of International Political Economy, [e-journal] 9(3), pp. 436-464. Web.
Jacoby, D., 2009. Guide to supply chain management: how getting it right boosts corporate performance. New York: Bloomberg Press.
Kano, L. and Verbeke, A., 2019. Theories of the multinational firm: a microfoundational perspective. Global Strategy Journal, [e-journal] 9(1), pp. 117–147. Web.
Mangan, J., 2011. Global logistics and supply chain. 2nd ed. Hoboken: John Wiley & Sons.
Mezzadri, A., 2008. The rise of neo-liberal globalisation and the ‘new old’ social regulation of labour: a case of Delhi garment sector. The Indian Journal of Labour Economics, [e-journal] 51(4), pp. 603-618. Web.
Ngai, P. and Chan, J., 2012. Global capital, the state, and Chinese workers: the Foxconn experience. Modern China, [e-journal] 38(4), pp. 383-410. Web.
Samson, C., 1970. Problems of information studies in history. In: S. Stone, ed. 1980. Humanities information research. Sheffield: CRUS. pp. 44-68.
Selwyn, B., 2008. Bringing social relations back in: (re) conceptualising the ‘bullwhip effect’ in global commodity chains. International Journal of Management Concepts and Philosophy, [e-journal], 3(2), 156-175. Web.
Tokatli, N., 2008. Global sourcing: insights from the global clothing industry – the case of Zara, a fast fashion retailer. Journal of Economic Geography, [e-journal] 8(1), pp. 21–38. Web.
Vorley, B., 2003. Food, Inc. corporate concentration from farm to consumer. London: UK Food Group.