eworld cluster development & the globalized supply base (part 2)

1. Supplier Development in aGlobal Market
Governance of the global value chain
September 2010

Why is governance important ?
The concept of "governance" is central to the global value chain approach . . . some firms in the chain set and/or enforce the parameters under which others in the chain operate . . . A chain without governance would just be a string of market relations.
Case Reference:Tesco control of the production of mangetout (snow peas or snap peas) in Zimbabwe
Why does governance matter?
Market access: developed countries dismantle trade barriers, developing country producers do not automatically gain market access, because the chains which producers feed into are often governed by a limited number of buyers . . . And access to and coordination with lead firms and their objectives.
Note: Lead firms according to Gereffi undertake the functional integration and coordination of international dispersed activities.
Fast track to acquisition of production capabilities: producers that gain access to the chains lead firms tend to find themselves on a steep learning curve . . . are very demanding with regard to reducing cost, raising quality and increasing speed (and are therefore unpopular with the local workforce) . . . best practices* and provide hands-on advice (and pressure!) on how to improve layout, production flows and raise skills.
* Similar The Wal-Mart position that their demands on their suppliers make them (being the suppliers more efficient).
Case Reference (The Bad?):Wal-Mart and Vlasic Pickles
Case Specifics: Finally, Wal-Mart let Vlasic up for air. The Wal-Mart guys response was classic, Young recalls. He said, Well, weve done to pickles what we did to orange juice. Weve killed it. We can back off. Vlasic got to take it down to just over half a gallon of pickles, for $2.79. Not long after that, in January 2001, Vlasic filed for bankruptcy.

On balance, firms that derive less than 10% of their sales through Wal-Mart averaged 39.1% in gross margin, the percentage of profit realized before items such as fixed costs and interest expense are considered. For those falling between 10% and 20%, gross margin was 36.2%. Above 20%, and margin dipped a little bit more, to 35.4%.

11. This trend is most pronounced in the apparel-and-accessories category, where average gross margin drops from 48.7% for companies generating less than 10% of sales through Wal-Mart to 28.7% for those selling 20% or more. Food and beverage also shows a big disparity, where the same breakdown shows average gross margins dropping from 39% to 22%. 12. In all, only 25 of 333 companies managed to beat their sector gross-margin average while generating at least 10% of their revenue through Wal-Mart. Only 7 that sold more than 20% there did it

eworld cluster development & the globalized supply base (part 2)

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