Amazon, Professor Cox and power in the supply chain

If I had to name the half a dozen most influential "academic" / thought leadership type individuals during my procurement career, one of them without a doubt would be Professor Andrew Cox, particularly for his work on power in supply chains.

Over recent years he has moved into being more of an entrepreneur, educator and consultant, (his focus now is largely with the IIAPS) rather than an academic, but his contribution to thought leadership is significant. It's a shame perhaps that it has never been quite as socialised into professional thinking as the Kraljic Matrix, for instance, perhaps because Cox tends to write fairly dense and somewhat difficult books. But his thinking is just as important, I believe, for the profession.

Cox pointed out that the success and ultimate profitability and growth of different players in the supply chain depended on how they can exert power on other players in the chain. He's not a huge believer in "partnership" I guess, but there are some great examples that illustrate his point. He can explain why Intel and Microsoft made more money out of the boom in personal computers than the equipment manufacturers or retailers ever did, for instance.

And this all came to mind last week when we saw the decision of Amazon to increase fees (commission rates) to their third-party merchants who sell through their site. That is a classic demonstration of the use of that power, built up by Amazon over the years, to the point where they control the destiny of many small firms who sell through their platform.

We're not criticising Amazon for this - if you believe in capitalism, you have to accept that this is what it is all about. Exploit your strength, extract more profit from the supply chain at the expense of those who are in a weaker position. And it's clear that Amazon from the beginning has been about establishing that supply chain / network power, far more so than any desire to make significant profits in the short term for instance. Once they really feel they have that power though, they will presumably want to use that to make some serious money.

And we might argue that any small firm who has allowed themselves to become so dependent on Amazon as a channel to market arguably deserves to have power used against them in this way.

But over longer periods of time, most firms who have a dominant position in a supply chain find it is unsustainable. Excess profits invites competitors, however powerful you appear. Nokia looked dominant in mobile phones us a few years ago - no longer the case. Even Intel and Microsoft are not the all-powerful firms they once were (with ARM and Mozilla respectively amongst their serious rivals now).

Or perceived exploitation of a market invites regulation - another factor that can moderate dominant positions.  Other players in the supply chain can also work to improve their own power, to the point where the previously dominant player is less so.

Almost 20 years ago, supermarkets in the UK started expressing an interest in moving into certain aspects of financial services. The large banks saw this as positive - this was another sales channel. They would decide which retailers they wanted to work with, dictating the process and how profit would be split between the parties.

I remember the shock in NatWest a few years on when we received a "tender document" from one of the large supermarkets. Were we interested in being their supplier of certain financial products, that would be badged as and sold by the retailer. "They think we're just a supplier" was the complaint. "How dare they ask us to bid and compete on price"!

But the retailers had understood that they now held the power in the supply chain, being more trusted than the banks and with millions of customers coming through their doors every week, and increasingly good databases generated by loyalty card schemes.

Anyway, it will be interesting to see how the Amazon game plays out. I think they'll be fine in the short term. But in the longer term, market exploitation tends to contain the tiny seeds of its own destruction. We'll see.

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Voices (2)

  1. Pete Loughlin:

    I’ve always admired Amazon – they were amongst the first to successfully exploit the internet as a supply chain tool They set the standard. They were the e-commerce exemplar.

    But the lunatics have taken over the asylum. Amazon no longer represent the new internet based paradigm. The new paradigm wasn’t about building up so much power that you can safely beat up your suppliers to squeeze even more profit for your shareholders. The new model wasn’t about employing your logistics staff on casual contracts more in keeping with 1930s dock yards than 21st century work places. And it wasn’t about arranging you tax affairs such that you make no contribution to the host country that subsidises your pitifully low labour costs through tax credits.

    I don’t mean to demonize Amazon – they’re not alone – but if they don’t want to be held up as the exemplar for greed over ethics then they should wise up.

    That is all

  2. Final Furlong:

    This is also how they are creating power “….strict Amazon rules which stipulate no products on the site can be offered by the same seller at a cheaper price elsewhere…” Most favoured nation…

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