Cooperative Purchasing in SMEs: Evidence from China’s retail sector – Ref No. 020-0326
Ref. No. 020-0326
Cooperative Purchasing in SMEs: Evidence from China’s retail sector
Wantao Yu
School of Applied Management & Law
Buckinghamshire New University
Queen Alexandra Road, High Wycombe
Bucks, HP11 2JZ, UK
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POMS 22nd Annual Conference
Reno, Nevada, U.S.A.
April 29 to May 2, 2011
Cooperative Purchasing in SMEs:Evidence from China’s retail sector
Abstract
This study investigates the typical advantages of cooperative purchasing for SME retailers, and critical success factors for managing a purchasing group, using a case study of a purchasing group established by four Chinese SME retailers. Thecase study suggeststhata successful purchasing group can help SME retailers to survive in today’scompetitivemarketplace. The main advantages of cooperative purchasing for SME retailers are lower purchasing prices, quality improvement and information sharing. The success factors for SME retailers to manage a purchasing group are similar characteristics of group members, similar personality traits of top executives, trust and effective communication among group members,and organizational cultural integration.
Keywords:Cooperativepurchasing;Success factors; SMEs; Retail; China
Cooperative Purchasing in SMEs: Evidence from China’s retail sector
- Introduction
During the past two decades there has been a paradigm shift in the role of purchasing in many firms. The present competitive environment requires that purchasingbecome part of the firm’s strategic planning process (Carr and Smeltzer, 1997).Cooperative purchasing has been considered as a vital linkin many world-class supply chain strategies (Choi and Han, 2007).Despite its long history, cooperative purchasing hasreceived relatively little attention in social sciences (Essig,2000; Laing and Cotton, 1997; Tella and Virolainen, 2005).Horizontal buyer-buyer cooperation has not been a majorresearch area until now, especially compared to vertical buyer-seller cooperation(Essig, 2000;Patterson et al., 1999). The lack of research attentionseems unjustified, with cooperative purchasing being increasingly well-established in practice (Doucette, 1997; Nollet andBeaulieu, 2003).In particular, cooperative purchasing among Small- and Medium-sized Enterprises (SMEs) does not seem to be either widely practised or, even when practised, well understood (Mudambi et al., 2004).
The small company attracts increasing attention from academia. Some previous studies (e.g. Gadde and Hakansson, 2001) have agreed that SMEs would particularly benefit from effective purchasing, since in order to be successful, their own limited resources need to be complimented by external resources.Compared to the large firm, SMEs operate undercircumstances that pose different purchasing challenges (Ellegaard, 2006).Although there is a growing body of research on purchasing practices in SMEs, research on purchasing in small companies is still limited(Quayle, 2002; Ellegaard, 2006; Pressey et al., 2009). In addition, Tella and Virolainen (2005) stated that there are a number of research opportunities in cooperative purchasing, such as “how can cooperative purchasing benefit SMEs?”.In particular, the critical success factors for managing cooperative purchasing among SMEs have received insufficient attention in the purchasing literature.
Given the academic and practical importance of managing cooperative purchasingin SMEs, we introduce a case study of apurchasing group established by four Chinese SME retailers.China’s retail market is highly fragmented and composed of many small- and medium-sized retailers. SME retailers in China have achieved rapid and sustainable growth during the past two decades. Such growth has increasingly contributed to China’s economic development (Mofcom, 2010). In 2008, more than 98% of retail companies in China were SME retailers, accounting for about 96% of the total sales volume of China’s retail industry. SME retailers generated about 80% of the total employment in the retail sector (CCFA, 2010; Mofcom, 2010). China’s retail sector is becoming increasingly competitive. SME retailers face keen competition not only from local giant retailers also from other multinational retailers in China.A report released by the China Chain Store & Franchise Association (CCFA, 2010) suggests that establishing cooperative purchasingis an innovative way for SEM retailers to survive and thrive in today’s highly competitive marketplace.However, a review of the literature reveals that relatively little is known about purchasing practices in ChineseSEM retailers.
Against this background we aim to explore two issues that have attracted considerable scholarly interest, which have nevertheless not yet received sufficient attention in academic research in the Chinese SMEs context (as noted above), namely:
- The advantage of cooperative purchasingfor SME retailers in China.
- The critical success factors for managing cooperative purchasing in SME retailers in China.
The remainder of this paper is organized as follows. Firstly, a literature reviewon cooperative purchasing is provided. Secondly, the design of this study and the methodological procedures are described. Thirdly, the findings of the study are presented and discussed, and a set of managerial implications are drawn. Finally, we conclude with a summary of findings and conclusions, as well as discuss the main limitations of this study and opportunities for future research.
- Literature review
- Cooperative purchasing
In today’s competitive environment, companies need to find ways to create more value in supply chains. Purchasing has been an integral andimportant part of supply chain formation. Building a strategic relationship with similar companies in the field of purchasing practices is one way ofachieving this.Purchasing has assumed an increasingly fundamental strategic role, evolving from an obscure buying functioninto strategic business partnerships (Ellram and Carr, 1994), and firms that emphasizecooperation are more likely to achieve greater economic benefits (Dyer, 2000).Cooperative actions enable members to achieve goals none can realize alone (Chisholm, 1998). Although purchasing cooperation between independent companies has been practiced for a long time, thephenomenon is not extensively researched. Cooperative purchasing in particular formed by industrial companies hasreceived relatively little attention in literature of the discipline(Tella and Virolainen, 2005).
In the purchasing literature many terms are usedwhen referred to cooperative purchasing, including horizontalcooperative purchasing, group purchasing, collaborativepurchasing, collective purchasing, joint purchasing, consortiumpurchasing, shared purchasing, pooled purchasing, bundled purchasing, and buyingoffices (Schotanus and Telgen,2007;Tella and Virolainen, 2005). The terminologyvaries because of thenature of the parties involved in the purchasingcooperation (Tella and Virolainen, 2005). Although there are certainpatterns in the use of the terms in the purchasingliterature,theterminology is broad and not yet fully stabilised (Tella and Virolainen, 2005; Schotanus and Telgen,2007). A review of the literature shows that “group purchasing” and “cooperative purchasing” arethe most popular terms. In this paper, the termsgroup purchasing and cooperative purchasing are used interchangeably.Schotanus and Telgen (2007) defined cooperative purchasing as “the cooperation between two or more organisationsin a purchasing group in one or more steps of thepurchasing process by sharing and/or bundling theirpurchasing volumes, information, and/or resources”.Cooperative purchasing generally consists of two or more independent buyers. They join together,or utilize an independent third party, for the purpose of combiningtheir individual needs for purchasing materials and capitalgoods/services to leverage more value-added pricing, services, and technologyfrom sellers that could not be obtained if each firm purchasedgoods/services individually (Choi and Han, 2007). Tella and Virolainen (2005) stated that cooperative purchasing is “horizontal cooperation”between independent organizations that pooltheir purchases in order to achieve variousbenefits. Drawing upon both the theory of partnerships and centralizing, Tella and Virolainendeveloped a theoretical framework of cooperative purchasing (see Figure 1).
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2.2.Advantages of cooperative purchasing
Collaborativerelationships canhelpfirmssharerisks(Kogut, 1988), accesscomplementary resources(Park etal.,2004), reducetransactioncosts andenhanceproductivity(Kalwani andNarayandas,1995), andstrengthen learning and innovation capability (Luo et al., 2006). Whatever the duration and objectives of business alliances, being a good partner has become a key corporate asset. Some previous studies (e.g.Anderson and Katz, 1998; Johnson, 1999; Nollet and Beaulieu, 2005; Tella and Virolainen, 2005;Choi and Han, 2007; Schotanus and Telgen,2007) have examined the advantages of cooperative purchasing. In many manufacturing or retail companies, purchasing managers have long pursued a policy of reducing costs,and cooperative purchasing has been considered as one of the most competitivestrategies for cutting costs in dynamic and competitive business environments (Choi and Han, 2007). In particular, Anderson and Katz (1998) identified three types of costreductions that cooperative purchasing can generate: price, administrative costs, and utilization costs. The companies involved in cooperative purchasing usuallyexpect to achieve lower costs, in addition to price reduction,lower management costs, increased flexibility of inventories andlower logistics costs are benefits that the members of a purchasinggroup may achieve (Tella and Virolainen, 2005).Moreover, Rozemeijer (2000) stated that cooperative purchasing brings about pooled negotiation power (purchasing together); bycombining their purchases, different companies can obtain greater leverage over suppliers, reducing the cost oreven improving the quality of the goods/services they purchase. Cooperative purchasing leads to better quality and value for customers and stronger partnerships with suppliersthrough commitment to contracts (SCEP, 2005).
In sum, typical advantages of cooperative purchasing are lowerpurchasing prices, higher quality, lower transaction costs,reduced workloads, reduced (supply) risks, and mutual learning opportunities(Schotanus and Telgen,2007). On the other hand, some anticipated and actual disadvantages of cooperative purchasing have been anecdotally reported in the literature, such as set-up costs,coordination costs, loosing flexibility, supplier resistance, and possible interference by anti-trustlegislation and the disclosure of sensitive information(Schotanus and Telgen,2007). However, in a large number of cases, the advantages of cooperativepurchasing outweigh the disadvantages for manysituations in the public and private sectors(Schotanus et al., 2010; Schotanus and Telgen,2007).Thus, at least in theory, cooperative purchasing can be a beneficial concept for organisations (Schotanus et al., 2010).
2.3.Critical success factors for managing cooperative purchasing
As noted above, some previous studies have investigated the advantages of cooperative purchasing. However, in practice, purchasing groups do not always flourish, and often end prematurely. A better understanding of factors affecting cooperative purchasing could help such groups to flourish, and could prevent premature endings (Schotanus et al., 2010). Over recent years, some authors (e.g. Nollet and Beaulieu, 2005; Quayle, 2002; Johnson, 1999; Laing and Cotton, 1997; Schotanus et al., 2010; Bakker et al., 2008) have identified a set of potential success factors for managing cooperative purchasing. The potential success factors are summarised in Table 1. As shown in this table, several empirical studies (e.g. Nollet and Beaulieu, 2005; Quayle, 2002) have examined the importance of roles of competence and trust in organizing cooperative relationships. The importance of formality of a purchasing group has also been discussed by several authors (e.g. Johnson, 1999). Moreover, Laing and Cotton (1997) stated that the existence of common objectives and interests of the group members has an important effect on managing a successful purchasing group. As can be seen in Table 1, some previous studies (e.g. Hoegl and Wagner, 2005; Laing and Cotton, 1997; Jost et al., 2005) have suggested that efficient and effective communication between group members has a significant impacton cooperative purchasing. More specifically, drawing upon transaction cost economics, social exchange theory and equity theory, Schotanus et al. (2010) identified critical success factors for managing small and intensive purchasing groups by comparing successful and unsuccessful purchasing groups in a large-scale survey. They concluded that the main success factors include enforcement of cooperation; cooperation of the group members and communication; commitment and internal support; common objectives and influence of the group members; and allocation of gains and costs. However, Schotanus et al. (2010) argued that it is more appropriate to treat other factors such as trust and formal structures as necessary, but not sufficient, condition for the success of purchasing groups.
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2.4.Cooperative purchasing in SMEs
A typical characteristic of the small company is itslimited resources, and onecritical effect of this shortage is lack of attention tostrategic purchasing. Small company owners performoperational acquisition of components, but do not developtheir purchasing skills and procedures. Moreover, limitedresources mean that vulnerability is high(Ellegaard, 2006; Arend and Wisner, 2005). In addition, the small company owner typically has limited supplymarket knowledge.Purchasing is a criticaltask in the small company,which is particularly dependent on external resources dueto its limited size(Gadde and Hakansson, 2001; Scully and Fawcett, 1994).Given the unique characteristics of small business, Ellegaard (2006) suggested that purchasing deserves moreattention in small company research.
Cooperative purchasing is becoming increasingly popular in both the private and public sectors in the EU and USA (Essig, 2000; Nollet and Beaulieu, 2005; Tella and Virolainen, 2005), and the evolution of cooperative purchasing seems necessary and unavoidable (Nollet and Beaulieu, 2003). Due to the unique characteristics of China’s retail sector, however, just a few small- and medium-size retail companies in China are conductingcooperative purchasing (CCFA, 2010; Mofcom, 2010;). For example, as a pioneerpurchasing group in China’s retail sector, nine small- and medium-size electronic appliance retailers established a purchasing group in 2002. However, because two of the nine group members were purchased by the leading electrical retailers in China over the last few years, the purchasing group ceased to exist (CCFA, 2010). In addition, four small food retailers in Zhejiang Province launched cooperative purchasing in 2004. During the last few years, some of the group members were purchased by retail giants. At the same time, the group accepted several new members. However, CCFA (2010) reported that the purchasing group faces a number of challenges, such as anti-trust, differentorganizational culture, and a lack of communication. Building upon the analysis of the implementation of cooperative purchasing among a number of SME retailers, CCFA (2010) suggested that establishing purchasing group is an innovative way for SEM retailers in China to survive in a dynamic and competitive marketplace.
3.Research method
This study employed an interpretative, qualitative methodology to examine thathow cooperative purchasing can benefit SMEs in China’s retail sector. Case study and field research can be extremely useful in answering questions about “how” or “why” phenomena (Yin, 2003).This methodology is typically aimed at generating deeper insights about purchasing issues and problems through direct observation and on-the-spot data collection (Voss et al., 2002; Stuart et al., 2002). For that reason, we chose to carry out in-depth and multiple case study research to provide insight into critical success factors for managing a purchasing group.
A purchasing group established by four independentSME retailers was selected for this study. As a pioneer of launching cooperative purchasingin China, the four retail companies that are located in the same province (HN Province) in China established a special purchasing group in 2002, named SFLC (“four retailers purchase together”).All four retail firms have been involved in the food retail sector for more than ten years in China. The names of the case companies have been disguised as “SFLC-1”, “SFLC-2”, “SFLC-3”, and “SFLC-4”, for confidentiality reasons. The descriptions of participant firms are summarized in Table 2.
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We undertook face-to-face interviews and interviews via telephone and Internet. Various tactics were employed to establish the reliability of the study. To minimize perceptual biases linked to managers’ specific organizational roles, we attempted to include informants with diverse functional and managerial backgrounds from different levels. As part of this field research, a total of 21 interviews were carried out withtop and senior executives(such as president, purchasing manager, operations manager, and store manager)of the four SME retailers, who were in charge of the retail operations function.Field research that investigates the views and opinions of companies directly and indirectly involved in the decision-making process is becoming increasing prevalent within the literature (Palmer and Quinn, 2003). Therefore, some interviews were also conducted withcashiers, stock persons, and salesmen. In addition, shop visits were arranged immediately after interviews so that we could have a better understanding of case company purchasing practices.
The length of the interviews typically varied from half-an-hour to two-hours. All of the interviews were tape recorded. For confidentiality reasons, the identities of respondents are not disclosed in this paper. Questions arising from the interview notes were answered by interviewees through follow-up emails and phone calls(Yin, 2003). Interviewees were invited to comment on the transcripts and to clarify points which had remained potentially unclear.Some statistics reported in this study have also been modified due to confidentiality reasons.In addition, multiple and independent sources of evidence, including market research reports, government statistics, company profiles, financial statements and other media were used to corroborate the interview data and develop convergent lines of inquiry (Yin, 2003; Voss et al., 2002; Stuart et al., 2002). The use of multiple respondents and multiple types of data mitigates the biases of a single respondent and increases the odds of capturing the organization’s view of a construct (Yin, 2003).
4. Findings and discussion
4.1.Advantages of cooperative purchasing
The interview data suggests thatcooperativepurchasingis a good way to for Chinese SME retailers to survive in today’s competitive and dynamic marketplace. Our interviewees have highlighted a number of the main benefits of cooperative purchasing for SME retailers, mainly lower purchasing price, quality improvement and information sharing.
Lower purchasing price was one of the expected objectives of establishing a purchasing group.Through cooperative purchasing, our interviewees stated that the group members can achieve a larger purchasing volumes and lower purchasing prices. Financial savings such as purchasing cost reduction are often an important reason for individual organisations to join a purchasing group (Nollet and Beaulieu, 2003). Over the last few years, business costs (such as labour, rental and transportation costs) have increased tremendously in China; profit margins are quite low, particularly in the food retail sector, where some daily products have zero profit margins (CCFA, 2010). Price competition is becoming more and more intense in the Chinese retail market (Hingley et al., 2010). Cooperative purchasing can help SME retailers to reduce logistics costs and gain lower purchasing prices. As a consequence, the retailers can provide lower price and add more value for their customers.