Dominant Retailer’s Roles in Supply Chain

By Lennon G. Babilonia

Dominant players are leaders in the industry. Dominant players along the supply
chain use their power to control activities and the other players’ behavior in the chain
to create and deliver products to the market. To effectively deliver customer
satisfaction, however, dominant retailers perform significant roles in providing the
right products whenever and wherever customers want them. The closest to the end-
customers are the retailers providing the link to the manufacturers and suppliers
products. A dominant retailer acts as a leader and therefore directly or indirectly
affects fringe retailers and other players in the chain including the manufacturers.
This essay will discuss how retailers dominate the supply chain and its vital
leadership roles in order to achieve its ultimate goal of customer satisfaction.

The discussion focuses on dominant retailer’s roles; however, similar roles are also
played by other dominant players in the supply chain, such as manufacturers or
suppliers. Suppliers and manufacturers here are defined as the upstream players
where retailers’ products are coming from. Both these players are assumed to deliver
goods to the retailers and maybe used interchangeably.

The structure of the essay begins with a definition of a retailer in the supply chain.
Then, a short discussion of how position of power in the industry is achieved by a
retailer with examples of the dominant retailers in a number of leading industries.
This will be followed by a discussion of the significant roles of a dominant retailer in
the supply chain: leading the competition, value creation, stimulant of innovation, and
price setter. Along with the discussion of the roles are the effects in the activities and
behaviours of players in the supply chain and, finally, the conclusion.

The retailers in the supply chain

Retailers are key players in the supply chain. Retailers connect upstream and
downstream markets. A product delivered to the end customer takes place through the
efforts of firms in the supply chain which consists of the suppliers, manufacturers,

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and retailers. These individual players are linked in a series of events and activities to
create a product from raw material to the actual goods and its delivery to the customer
(Cooper et al., 1997, Benton and Maloni, 2005). Suppliers produce raw materials.
Manufacturers create products from raw materials coming from suppliers. A retailer,
on the other hand, buys goods or products from suppliers or manufacturers and then
sells these goods and products in smaller quantities to the end-users. While these
players are linked in the chain, the strength of the supply chain is only as good as its
weakest player. Thus, without good suppliers a manufacturer cannot be responsive,
and without good retailers operating soundly or aligning with the manufacturer’s
strategy the end customer will not benefit from such a relationship (Benton and
Maloni, 2005). The most popular types of retail establishments are supermarkets,
department stores, specialty stores, and on-line retail stores, like eBay, for example
(Retail-Trade, 2010). Retailers are the players mostly visible and accessible to the end
customers and thus share significant roles in delivering products to the end
customers and attracting end customers to the products.

Position of power – the dominant retailer

Successful companies possess power or control over something or someone. Because

of the need for resources, a dominant player enjoys power base on the scale of
dependence on these resources by other players (Cox, 1999, Ramsay, 1996). According
to Cox (1999) firms must decide to position themselves somewhere in the supply chain
in order to manage and control the chain. In the car industry, for example, Ford and
GM historically tended to integrate the entire chain vertically from the supplier to the
end customer. On the other hand, most car assemblers now do is to focus and develop
expertise on particular resources in the chain (Cox, 1999). The latter approach is
focusing on the internal skills and resources of the company or their core competency.
“The core competence paradigm is based on companies understanding what internal
skills and resources they should own and control through internal contracts in order
to sustain their business success” (Cox, 1999, p.169)

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Retailers’ competency is its operational ability to beat competition concentrating on
customer satisfaction through the delivery of the right product, at the right time, and
at the right place (Malone, 2007). Retailers have the information on market sensitivity
and on the demands of the end customers and, hence, on their overall satisfaction.
Through this information, retailers have the capability to control and deliver resources
and thus have the ability to make promises or threats or even to give rewards or
punishments to the suppliers (Ramsay, 1996). Retailers, as well as other players in the
chain, are well aware of the inadequacy of their power to secure value from others and
would search for ways to place more value for themselves if the situation will allow
them (Cox, 1999). Literatures suggest that in the retail industry, understanding how
to maintain power over suppliers is the key for retailers. Chen (2003) refers to this as
the countervailing power of dominant retailers over suppliers and exercised in behalf
of the customers. A dominant retailer, therefore, can be understood and be expressed
as leadership or having control of their supply chain from supplier to the end users
(Lawrence and Smith, 2006).

Roles of Dominant Retailers

As a dominant retailer in the industry, a firm takes on a very active role as a

leader. Being so, the firm exercises power to shape the industry’s environment by
enhancing competition among the players within the supply chain (Lettice et al.,
2009). A dominant retailer creates the total added value which the customers desire
for by combining manufacturer’s products with its own resources (Ramsay, 1996). It
also drives innovation across the supply chain by influencing other players to
implement responsive operations. Finally, dominant retailers act as a price leader by
setting the prices of products across the industry. A retailer, therefore, is very
significant in the supply chain.

Leading the competition

The retailers role in the supply chain are influenced by the competitive nature of the
market (Cox, 2001, Cooper et al., 1997). Its position in the industry is affected by the

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external and internal factors that influence the nature of the competition and how the
company competes. In the Power Matrix developed by Cox (2001), the author claims
that there are actually power attributes of a retailer relative to the supplier that allows
a dominant retailer to position ahead of the supplier. Porter’s five forces provide a
framework for analyzing a dominant retailer’s power attributes in the industry.
Porter’s five forces are: Power of buyers, rivalry in the industry, threat of substitute,
threat of new entrants, and power of suppliers (Porter, 1979).

Dominant retailer establishes a position of strength by capitalizing on its buyer power

and knowledge of the market (Cox, 2001). Most often, customers prefer a wide
selection of products which retail outlets effectively deliver. As previously emphasized,
retailers have the primary advantage of being the most accessible player to the final
consumer. The development of technologies to track and monitor product sales
allowed retailers to identify the patterns of customer purchasing and to respond
immediately to customer demands or any changes in the market environment. Thus,
retailers have the knowledge of highly demanded products, potential new products,
and those products that need to be positioned to do well in the market. With this
knowledge, retailers control almost entirely the supply chain by creating a rippling
effect of responding to the demands of the consumers. For example, when a retail
store runs out of a particular product, manufacturers and suppliers will have to
produce and deliver supplies faster and more efficiently in order to meet order on time.
They may even have to make changes in the production line and warehousing strategy
to lessen production costs and lead times. A dominant retailer, in this case, controls
the supply chain by exploiting its buyer power. Partly because of their size, dominant
retailers such as Wal-Mart and Toys "R" Us used their resulting buyer power to obtain
more favorable trade terms from their suppliers (Chen, 2003). The possession of this
critically important resource creates a structured hierarchy of relatively dependent
suppliers and manufacturers (Cox, 1999, Cox, 2001, Ramsay, 1996).

Retailers intensify rivalry in various industries making them critical actors in

the supply chain. The interaction between suppliers/manufacturers and retailers
occur in the competition among suppliers/manufacturers for shelf space that provides

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opportunities for retailers to shape the conditions of supplies. This competition for
shelf space in retail shops leads to attractive packaging, building alliance or
dealerships that prohibit some outlets from stocking rival products or even paying
retailers to display products in a strategic position in the retail store. The result is an
environment where suppliers and manufacturers pursue innovative means to promote
products and take on other marketing costs in order to have market visibility.
Naturally, retailers favoring a certain supplier will result to that supplier’s products
having more shelf space and faster product turn over. The retailer therefore
determines the competitiveness of the manufacturer’s brand.

Retailers can also affect the entry of new companies in the market. One of the difficult
challenges a new company faces is the distribution channel to the final consumer.
Retailers are the most extensive distribution channels since they deliver the products
directly to the end customers. Because of their control over the shelf space, retailers
can actually reduce or increase the level of entry for new companies by displaying
products of suppliers from which they only have alliance. On the other hand, a retailer
can reduce barriers to entry by making its shelves available for display of new
products.

Retailers can provide access to substitute products. Since they have become very
powerful and vital in the supply chain, retailers can choose the products to stock and
to display. Retailers, therefore, have the power not only to introduce new products but
to promote substitute products. Substitute products can be a threat to an industry’s
profitability if the price and quality are good enough for the customers to turn to just
to satisfy their basic need. A dominant retailer can also ask his suppliers to decrease
their selling prices to stay competitive against other suppliers and new products (Li et
al., 2010). In some cases, retailers themselves are developing and manufacturing
highly demanded products as substitutes.

Retailers also realize the power of the supplier or manufacturer over them (Caniëls and
Gelderman, 2007). This is especially true for big suppliers of highly demanded
products. However, suppliers are also aware of the value of retailers in promoting and
carrying their products to the consumers. For example, if disagreement follows after

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facing fewer but larger retailers, a supplier’s bargaining power will critically depend on
his ability to cope with being cut off from a large portion of the market (Inderst and
Wey, 2007). Suppliers give various incentives like sales and monetary support,
advertisement or display materials, and selling aid samples. This uncomfortable
position of a supplier relative to the dominant retailer confers upon the retailer a
countervailing power over the supplier (Chen, 2003). Thus, it is important for the
suppliers/manufacturers to establish a relationship with its retailers (Benton and
Maloni, 2005, Chen and Xiao, 2008, Cox, 2001, Lettice et al., 2009). In some cases,
information sharing between retailers and suppliers is widely applied to coordinate
consumer demand and inventory levels. Ideally, coordination between the supply and
the demand is much better when retailer shares information with the manufacturer,
particularly the consumer demand and retailer inventory information, as this will
enhance performance throughout the chain (Benton and Maloni, 2005, Lettice et al.,
2009, Wang et al., 2008). Big retailers use this leverage of knowing customer demand
to negotiate and turn over power to their side (Cox, 2001, Chen, 2003, Chen and Xiao,
2008, Wang et al., 2008).

Value-added Creation

The retailers provide at the end of the supply chain the overall added value to the
manufacturers’ or suppliers’ products that it carries. In reality, consumers are buying
more than the basic products and that these products are not exclusively made by
manufacturers (Keller and Lehmann, 2002). The retailer augments their own
resources and puts on additional components to create the “service” and the total
value purchased by the consumer. In some cases, manufacturers, appear as
contracted production instruments of the parts being assembled by retailers.
Customer satisfaction varies according to the nature of the services being provided by
the retailer. The store, for example, carries a lot of perception to the customers and
forms part of the overall value creation of products. Efficient stores have the right
products available all the time for the customers. A store’s structure and operations
must quickly scale to handle peak demands, like Christmas, Easter, and other key
selling seasons, for example (Gibson et al., 2010). Stores must also adapt to the

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culture of the people where it is geographically located. The case of Wal-Mart in
Germany is a classic example of how culture affected store operations and causing the
store to close down. The retailer applies the final touches to the products. Therefore,
the manufacturers and the retailers must cooperate in the creation of the final
product. The manufacturer produces its product while the retailer adds “service”
creating the total value that customers pay for. This makes the retailer a key
participant in the supply chain that needs to be managed properly.

Ensuring consumer satisfaction is now more a responsibility of retailers. Before,

manufacturers determine products which they believe the consumers want and that
the retailers only act as the medium between manufacturer and consumer. However,
contemporary retailer’s business operations reflects ways and means to satisfy
consumers. These include wider choice of products, faster IT systems, effective
management, and safer environment, all designed to please the customers. Thus, by
combining their resources with that of the manufacturers/suppliers, the retailer
creates the buying experience that is responsive to the expectations of the consumers
(Cox, 1999, Ramsay, 1996). In fact, retailers are ‘filtering’ the wide variety of product
assortments offered by manufacturers, thus permitting buyers to spend lesser time
and resources selecting products (Fornari et al., 2009). Retailers also provide product
and consumption feedback to the manufacturers to ensure that the needs of the
consumers are attained by the final product offer.

Dominant retailers also backward-integrates their activities in the supply chain.

Dominant retailers participate in providing solution to disagreements between the
upstream players and the customers. Retailers optimize operations, reduce inventory,
and improve activities upstream and downstream (Gibson et al., 2010). For example,
retailers have to resolve the risk of overstocking due to suppliers maximizing profits
from the economies of scale. On the other hand, retailers provide postponement
services with her partners in the supply chain to provide high quality products at the
fastest delivery time (Ng and Chung, 2008) as demanded by the customers. Normally,
the practice is that retailers must align with the strategy of the suppliers or
manufacturers (Caniëls and Gelderman, 2007, Benton and Maloni, 2005). With

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dominant retailers, however, manufacturers and retailers must familiarize with each
other’s process or product technologies. These players must consult each other or at
the very least consider how the other party will respond (Lettice et al., 2009, Gibson et
al., 2010). In effect, dominant retailers can initiate alliances and integration by linking
manufacturing, distribution, and procurement in their operations (Bowersox et al.,
2010).

Stimulant of innovation

The presence of a dominant retailer stimulates innovations (Inderst and Wey, 2007,
Etro, 2008, Malone, 2007, Fornari et al., 2009). According to Benton and Maloni
(2005), process improvement and technology are among the critical elements that
provides firm a competitive advantage within the industry. Retailers use information
and technology to influence the supply chain which brings about changes in the
different players’ products and services in order to address customer needs (Lettice et
al., 2009, Gibson et al., 2010). Dominant retailers attract competition and thus drive
innovation within the retail industry, among suppliers and manufacturers, and in the
other players in the supply chain (Inderst and Wey, 2007, Fornari et al., 2009). Also,
according to Etro (2008) market leaders are both a cause and source of innovation.
Since current leaders can be replaced by innovators quite quickly in an environment
where competition is open, market leaders invest deeply into technology and
innovations to retain their leadership.

Within the retail industry, dominant retailers must innovate in order to stay on top of
the chain or to remain in business. Due to threats from potential entrants and equally
innovative competitors, dominant retailers are pressured to relentlessly generate better
products and services (Etro, 2008). Wal-Mart is one example of a retail company that
makes bold use of technology to innovate its processes and service. In the 1990s it has
the biggest database in the United States that it uses for tracking inventory of
products. Its fast and efficient transportation system, warehouses for stocking large
quantities of goods, and new stores close to the warehouses reduced the cost of
shipping and kept inventory in the store at the right level (Chandran, 2003, Wal-Mart,

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2010). The company also hired manufacturers and introduce its private-label goods
Sam's American Choice, 01′ Roy, and Great Value (Wal-Mart, 2010). Further, its radio
frequency identification (RFID) electronically tags pallets, cases, and items to track
products from the distribution centers to the stores and thus effectively accomplishing
just-in-time (JIT) delivery (Spekman and Sweeney, 2006). Through this system, Wal-
Mart continues to have a good inventory of popular products and can speedily
purchase products when demanded by customers (Malone, 2007, Spekman and
Sweeney, 2006). Through constant innovation Wal-Mart maintains its leadership in
the retail industry.

Wal-Marts leadership attracts fringe retailers to be innovative as well. For example, to

address competition and beat Wal-Mart in price, sportswear retailer Steve and Barry’s
in Ohio develop its own auto-replenishment system to track sales, alerts distribution
centers to pull merchandise, sends trucks to stores, and use direct truck floor loading
instead of pallets to maximize the use of space (Malone, 2007). Similarly, the
successful entry of UK’s leading retailer, Tesco, into US soil in spite of Wal-Mart’s
overwhelming dominance was attributed to the company’s culture of innovation and
adaptability in the international markets (Tidd and Bessant, 2009). Wal-Mart did not
only efficiently deliver its promise of right products at the right time to the customers
but it forced its suppliers to innovate in order to have a more responsive operations.

Dominant retailers also influence the innovation of players at the back channel.
According to Bowersox et al. (2010) a dominant retailer, which is usually faced with a
huge amount of inventory, attempts to reduce risk by pushing inventory responsibility
back to suppliers or manufacturers. For example, Target Corporation and Wal-Mart
required their major suppliers to be RFID-equipped before 2007 (Spekman and
Sweeney, 2006). Also, retailers can use the customer purchasing information to
improve suppliers’ product range or promotional campaigns and become more
responsive to changes in customer demands. Through ‘Specification Buying’,
dominant retailers can tell a manufacturer exactly what to make and even how much
it should cost to produce. ‘Specification Buying’ is a also powerful tool that establishes

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retailers’ leadership in the channel (Fornari et al., 2009, Chen, 2003). According to
Inderst and Wey (2007) a supplier facing larger retailers will opt to invest heavily in
product or process innovation in order to offset losing a large retailer’s order through
increased sales to other retailers.

Other players in the chain must also innovate to accommodate big retailers.
TradeStone Software in Boston, for example, has developed “unified buying system”
software allowing suppliers and retailers to instantly track consumers demand and
rapid changes in prices (Malone, 2007, Inderst and Wey, 2007). Similarly, Oracle, a
leading software manufacturer that provides software services to 17 of the top 20 US
retailers, constantly introduces software systems for retailers and manufacturers
(Dickson, 2007). Wal-Mart’s use of RFID also made big players like Microsoft, IBM,
and Intel to play catch-up with the technology (Spekman and Sweeney, 2006). Also,
marketing companies uses customer information to make relevant and highly
profitable advertising messages that will attract customers. Annuncio Software Inc.,
for example, concentrates on customer information to innovate e-marketing services
for Charles Schwab Corp., Dell Computer Corp.'s, J.D. Edwards & Co., and Avaya
Communications Ltd., (Chiem, 2001). Retailers’ knowledge of the market thus provides
an avenue for other players to innovative.

Price leader

Dominant retailer is a price leader. Because of their superior technology and

innovative means of doing business, big retailers can lower their costs and be able to
offer lower prices for products thus capturing a large share of the market (Chen, 2003,
Gibson et al., 2010, Fornari et al., 2009). Further, the dominant retailer is a major or
biggest distributor of the supplier and can provide the advertising service to promote
sales (Chen and Xiao, 2008). Retailers access to customer preferences and demands,
the selling price to customers, and the purchasing price from suppliers are
information that provides retailers the negotiating power over the suppliers with
regard to purchasing price (Chen, 2003, Cox, 2001, Inderst and Wey, 2007, Li et al.,
2010, Ramsay, 1996, Wang et al., 2008). This imperfect knowledge on the part of the

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manufacturer allow retailer to influence the designing of the contract for the purchase
of products(Wang et al., 2008). On the other hand, according to Chen (2003), it is not
only because of the big retailer’s countervailing power over the suppliers that they are
able to get a favorable trade terms, such as lower wholesale price. Indirectly,
purchasing cost decreases because suppliers offer lower prices to other retailers in
order to reduce the countervailing power of dominant retailers. Dominant retailers’
threat of not purchasing is also an effective means of lowering price as suppliers will
be forced to sell at a lower price the unsold products to the remaining fringe retailers
(Inderst and Wey, 2007). Therefore, the presence of large retailers may reduce the
supplier’s profits and benefits the end consumers.

Dominant retailers set retail prices. In a dominant retailer model, multiple fringe
retailers often compete against a dominant retailer (Chen, 2003). Fringe retailers
usually consider the price set down by the dominant retailer as the prevailing market
price (Chen and Xiao, 2008). Because retailers can opt to introduce new products,
promote substitute products, and manufacture “own label” products, like Woolworth’s
“Home Brand” or Cole’s line products, for example, retailers compete not only with
other retailers but with manufacturers and suppliers as well. Also, retailers like Wal-
Mart, commonly use "Everyday Low Pricing" (EDLP) strategy which has a constant low
price and avoids temporary promotional price discounts usually offered by
manufacturers (Bowersox et al., 2010).

Conclusion

Retailers are significant players in the supply chain. Being at the end of the
supply chain and closest to the end customers, retailers have the superior knowledge
of the market and its demands compared to other players in the chain. A dominant
retailer uses this knowledge as a leverage to gain power and to control the supply
chain. As a leader, a dominant retailer has significant roles that influence the behavior
and operations of other players in the chain. A dominant retailer positions itself by
flourishing competition within the industry and in the supply chain. As a link between
the supplier and the end customer, dominant retailers provide the added value that
makes up a complete package of products. The store, for example, exemplifies the

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added value that dominant retailers offer to promote products to the end customers.
Dominant retailers continuously innovate in order to stay in that position and thus
attract other players in the chain to become more responsive and to innovate as well.
As a price leader, dominant retailers set industry’s price standards and negotiates, in
behalf of the customers, for a lower production cost by the manufacturers and
suppliers. Thus, a dominant retailer’s roles influence the chain and the players.

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