Captive Supplies Research Articles

Treat your suppliers right! Aligning strategic innovation orientation in captive supplier relationships with relational and transactional governance mechanisms

Buyer‐supplier relationships are regarded as a source of competitive advantage, as suppliers can contribute valuable but imperfectly tradable resources. To coordinate these resources in the course of joint value creation and mitigate the risks of opportunism, buyers are required to establish transactional and relational governance mechanisms. While recent research showed that these mechanisms are intertwined with each other, little is known about the effects of different governance mechanisms in relationships with captive suppliers. Especially in case of captive suppliers, which are highly dependent on the buyer, the governance approach of the buyer affects the relationship and the supplier on a long‐term base. Based on unique data of 101 suppliers in the aviation industry, we show that transactional and relational governance mechanisms exert different effects on the efficiency and effectiveness of relationships with captive suppliers. While transactional governance is primarily suited to foster buyer‐supplier efficiency (e.g. cost or lead time reduction), relational governance strengthens buyer‐supplier effectiveness (e.g. product customization or joint innovation). Additionally, the choice of a governance mechanism indirectly affects the strategic innovation orientation of captive suppliers. Focusing on buyer‐supplier effectiveness stimulates strategic innovation orientation of captive suppliers; high buyer‐supplier efficiency leads to opposite effects. Our paper emphasizes that misalignment of governance mechanisms and the objective of buyer‐supplier relationships can limit strategic innovation orientation.

A Note on First-Price Sealed-Bid Cattle Auctions in the Presence of Captive Supplies

The authors present an analytical model of a first-price sealed-bid cattle auction in which a spot and coordinated markets are interconnected. The model reveals that the conventional wisdom that market coordination negatively affects the bid price in the spot market is an oversimplification. The relationships between key market variables impact bids and bid shading in complex ways. While captive supplies can lead to lower spot prices, the price reductions do not necessarily stem from an increase in market power due to contracting. The model emphasizes the importance of several variables for future empirical studies.

Natural Gas Matters: The Shale Boom, Captive Supply, and the “Super Build”

The shale gas phenomenon, and particularly the role of the Northeast in the evolution of that phenomenon, has caused the natural gas industry to need an unprecedented ability to deal with difficult‐to‐predict, rapidly changing market dynamics.

Causality Between Captive Supplies and Cash Market Prices in the U.S. Cattle Procurement Market

This study tests the causal direction between captive supply and cash market price in the U.S. cattle procurement market. Finding the correct causality should provide useful information to the decades-long debate on packers’ anti-competitive behavior in the U.S. cattle procurement market. It should also help researchers find better econometric specifications for the cash price-captive supply relationship. Two causality tests—the Granger test and the Modified Wald test—were conducted. Overall test results indicate that captive supply causes cash market price, and it favors the price-dependent model.

Pricing Linkages Between Added Value Levels Of The Beef Industry: A Systems Approach

Agricultural commodities, and in particular the livestock industry, experiences cycles in prices, demand, and supply conditions. Large variations can result from a variety of factors which influence the regularity, magnitude, and the severity of the cycles. In the last few years the U.S. Livestock industry has suffered through hard financial times. Grass roots organizations such as WORC have accused the packers for using their economic power gained from concentration and the use of captive supplies for low prices at the slaughter and cow-calf levels. To compound the issue IBP, the largest beef packer, with 33 percent of the beef kill is for sale and has been bid on by other packers, potentially concentrating the industry more and reducing the number of bidders for slaughter cattle. The article found that the inefficiencies and price distortion in the value system were not at the packer level, but rather the retail level and between the feedlot level and the cow-calf levels. Because of changing marketing arrangements, price discovery issues in the concentrated markets needs to be resolved before suspicion will disappear.

The Long‐Run and Short‐Run Impact of Captive Supplies on the Spot Market Price: An Agent‐Based Artificial Market

An agent‐based model is developed that matches the results of Xia and Sexton (2004) as well as our generalization of their model. We relax Xia and Sexton's assumption of no supply response by captive feeders, which reduces the price‐depressing effect of captive supplies. Finally, the agent‐based model is used to simulate packers choosing both captive supply quantities and spot market quantities. Packers in the relaxed agent‐based model choose no captive supplies and thus reach the Cournot solution. The research narrows the gap between theoretical models and the empirical work on captive supplies that shows little effect on prices, but a gap remains.

Impacts of alternative marketing agreement cattle procurement on packer costs, gross margins, and profits: evidence from plant‐level profit and loss data

AbstractThis work measures the impact of captive supplies, or cattle procured through alternative marketing agreements (AMAs), on meatpacker costs, gross margins, and profits. Confidential profit and loss data were examined from all the individual packing plants within the four largest packing firms for a 30‐month period. Alternative marketing agreement use resulted in improved beef supply chain efficiency, product demand, and plant profitability. The slaughter and processing costs were lower for plants with higher volumes of AMA cattle relative to cash market cattle. Plants that slaughter cattle from AMA sources operated at higher volumes, had less variable volumes, and had lower average total costs per head because of the substantive economies of size. Plants that slaughter cattle from AMA sources also had higher gross margins and average profits per head. The general conclusion is clear: If policies are implemented that limit AMA use then packing industry efficiency would be negatively impacted. [EconLit Citation: Q130]. © 2010 Wiley Periodicals, Inc.

The Changing Structure of Global Food Markets: Dimensions, Effects, and Policy Implications

In this paper I discuss trends in ownership concentration in three principal stages of the food system: food retailing, food manufacturing, and selected inputs purchased by agricultural producers and by food processors. In each of these levels, the available information from North America, Western Europe, or global sources shows that sales concentration is increasing. Sales concentration is linked to substantial consumer welfare losses for consumers, but there is also evidence of small efficiency gains. I assess the complex phenomenon of vertical market power in food subsectors by focusing in the issues of captive supplies and channel captaincy. Finally, I assess the current role played by public policies in ameliorating consumer and producer welfare as it is affected by the exercise of market power. In general, I view competition laws that apply to horizontal conduct as more settled and more easily enforced than are public policies directed at vertical strategic conduct.

Legal and Economic Issues with the Courts' Rulings in Pickett v. Tyson Fresh Meats, Inc., a Buyer Power Case

In the historic cattle trial, Pickett v Tyson Fresh Meats, Inc., Plaintiff cattlemen alleged that Tyson/IBP used captive (contracted) supplies of cat tle ready for slaughter to manipulate the cash market, in violation of the 1921 Packers & Sto ckyards Act (PSA). After a five week Trial in Federal Court, the Jury found Tyson/IBP guilty o n all counts and assessed actual damages of $1.28 billion, which applied to a large but unspeci fied number of cattle, likely 10-50 million head. Justice for Plaintiff cattlemen was short, as the T rial Judge set aside the Jury’s verdict—a rare but not unprecedented legal action—and entered summary judgment for Tyson. The Eleventh Appellate Court subsequently sided with the Trial J udge. In 2006, the United States Supreme Court denied without comment Plaintiff’s Petition t o rehear the case, thus ending legal activities in Pickett v Tyson and effectively killing similar legal action pending un der the same Trial Judge against two other major beef packers, E xcel (Cargill) and Swift (ConAgra). Together the three packers account for over 70% of fed cattle slaughter. In essence Pickett was filed under the PSA, tried under Sherman and Clayton antitrust law, and overturned, in part, under the Robinson-Patman Act, with the Trial Court and the Appellate Court implicitly appointing themselves as fact-find ers. This is not how the American judicial and legislative system is supposed to function. The Courts gave a narrow and extreme interpretation to the antitrust rule of reason and to the meaning of “unfair” in the PSA. The PSA as well as the Sherman and Clayton Acts may be greatly weakened if not essentially repealed if the Courts’ Opinions in Pickett come to dominate case law.

Buyer‐supplier relationships in the Turkish automotive industry

PurposeUsing a baseline model of buyer‐supplier relationships, the study aims to identify the types of relationships in the Turkish automotive industry, and to test predictions as to how these relations would differ across contextual, managerial, and social climate variables.Design/methodology/approachQuestionnaire data from 51 buyers in automaker firms and 72 supplier firms were subjected to K‐means cluster analyses to establish relationship groups in the two samples. Differences across the groups were tested using ANOVA and Scheffé tests.FindingsThree relationship types (captive supplier, market exchange, and strategic partnership) were identified both in the buyer and supplier data. Significant differences were observed in terms of contextual (product and supplier characteristics), managerial (information exchange and cooperation), and social climate variables (mutual understanding, payoff equity, and satisfaction). Turkish buyers were found to strategically segment their suppliers based on product and supplier characteristics, whereas supplier groups were differentiated along social climate variables.Research limitations/implicationsThe Turkish results differ somewhat from the ones for developed countries, which suggests that more work should be conducted in emerging economies. Future research that uses matched pairs of buyers and suppliers may provide in‐depth insights.Practical implicationsThe results demonstrated a perception (hence, communication) gap between buyers and suppliers in how they differentiated relationship types. Strategic partnership led to cooperation in both samples, and to satisfaction, mutual understanding, and equity in the supplier sample.Originality/valueThis study used data from both parties, contrasted buyer‐supplier relationships in an emerging market with those in developed markets, and highlighted the effects of the industry's historical evolution on the present state of buyer‐supplier relationships.

Management of buyer–supplier conflict: The case of the Turkish automotive industry

This study utilizes data from 50 buyers in automakers and 72 suppliers to study conflict management in Turkish buyer–supplier relationships. The traditional practice of buyer dominance was tested against Bensaou's [Bensaou, M. Portfolios of buyer–supplier relationships. Sloan Management Review 1999; 40(4): 35–44.] strategic segmentation model. A two-dimensional conflict management model was used, comprised of forcing, problem-solving, compromise, accommodation, and avoidance styles. The traditional pattern of relations would predict forcing for the dominant and large buyer firms, and accommodation for the smaller and dependent supplier firms. Bensaou's two-dimensional model identifies four relationship types: strategic partnership, market exchange, captive buyer, and captive supplier. Mapping the two models on each other, we predicted (for buyers) problem-solving for strategic partnership, avoidance or compromise for market exchange, accommodation for captive buyer, and forcing for captive supplier. The results, which were more in line with the traditional pattern of relations, are discussed within the context of the Turkish culture and the historical evolution of automotive buyer–supplier relationships.

Proving Anti-Competitive Conduct in the U.S. Courtroom: Economic Issues with the Courts' Opinions in Pickett v. Tyson Fresh Meats, Inc.

Four articles have been published in this Journal about the historic cattle trial, Pickett v Tyson Fresh Meats, Inc., in which Plaintiff cattlemen alleged that Tyson/IBP—the buyer—used captive (contracted) supplies of cattle to manipulate the cash market in violation of the 1921 Packers & Stockyards Act (PSA). The first article gave a Trial's eye view by David Domina who served as co-lead counsel representing Plaintiff cattlemen. Domina's article led to a published comment by Thomas Green who was the lead attorney representing Tyson during the Trial phase of lengthy legal proceedings. Green alleged that Domina's article was "littered with rank speculation and baseless opinion." Domina countered that "proof is not litter, and evidence is not rank speculation" and that Green's commentary was "abusive." The adversarial exchange between Domina and Green was followed by another advocacy article in which William Rosales maintained that Pickett "represents an opportunity for the judiciary to reform the meatpacking industry (and) awaken the (PSA's) intended power to dethrone the economic kings of the meatpacking industry."After a five week Trial in Federal Court, the Jury found Tyson/IBP guilty on all counts and assessed actual damages of $1.28 billion over 2/1994 -10/2002. Justice for Plaintiff cattlemen was short, as the Trial Judge set aside the Jury's verdict—a rare but not unprecedented legal action—and entered summary judgment for Tyson. The Eleventh Appellate Court subsequently sided with the Trial Judge. On March 24, 2006, the United States Supreme Court denied without comment Plaintiff's Petition to rehear the case, thus ending legal activities in Pickett v Tyson and effectively killing similar legal action pending against two other major beef packers, Excel (Cargill) and Swift (ConAgra).This article emphasizes three significant and troubling legal and economic issues from the historic litigation: (1) the Courts' narrow and extreme interpretation of the antitrust rule-of-reason; (2) the Courts' endorsement of a "meeting the competition" defense, and (3) whether the Courts inserted themselves above the Jury as fact-finders in the case, contrary to the 7th Amendment to the U.S. Constitution that establishes the Jury as the only fact-finder in civil litigation.In essence Pickett was filed under the Packers and Stockyards Act, tried under Sherman and Clayton antitrust law, and overturned, in part, under the Robinson-Patman Act.

Managing Indefinite Boundaries: The Strategy and Structure of a Chinese Business Firm

This paper examines the status of boundaries in organizational theory. Tacitly if not explicitly, most researchers view organizations as bounded, tightly coupled and more or less rational systems. Yet organizations may also be open, loosely coupled, hierarchically nested systems whose boundaries are indefinite. In the case of China, incomplete separation of firms from the state, incomplete integration of firms and partial listing of assets have left most Chinese firms with indefinite boundaries. While many Chinese firms are disadvantaged by indefinite boundaries, some have managed their boundaries advantageously. The Chinese group corporation described here has resisted interference from its state owners, one of whom tried but failed to turn it into a captive supplier. It has secured full operational and financial control of subsidiaries despite their independent legal status, fractional local government ownership, and local government representation on their boards. And it has successfully funded and executed an aggressive acquisition strategy and now dominates its industry globally. There are lessons specific to the Chinese context. The most important is that boundaries should be assumed indefinite unless shown otherwise. And there are lessons about firms in emerging economies. Indefinite boundaries are characteristic of such firms; indefinite boundaries pose either threats or opportunities depending on the strategic response; lastly managing indefinite boundaries will be a key strategic priority and a precondition of finding and exploiting market opportunities.

Captive supplies and cash market prices for fed cattle: The role of delivery timing incentives

AbstractThe use of non‐cash methods of procuring fed cattle for slaughter has led to concern about the effect of these so‐called “captive” supplies on cash market prices. Some empirical evidence suggests that there is a negative short‐run relationship between the two: Cash market prices tend to be low in weeks in which captive supply shipments are high. We advance a different perspective on the relationship between captive deliveries and cash prices, arguing that the incentives that influence cattle delivery‐scheduling decisions could lead to a negative relationship, not between the contemporaneous levels of captive shipments and price, but between the volume of captive deliveries, on the one hand, and an ex ante expectation of a week‐to‐week price change, on the other. Econometric testing provides some evidence of this empirical regularity in the cattle procurement activities of four large packing plants in Texas in the mid‐1990s. [EconLit citations: Q130, L140.] © 2004 Wiley Periodicals, Inc. Agribusiness 20: 347–362, 2004.

Captive supplies and the spot market price of fed cattle: The plant‐level relationship

AbstractNumerous articles in the agricultural economics literature investigate the empirical relationship between the spot market price of fed cattle and the volume of packers' precommitted, or “captive,” supplies of cattle. In this article, we use an extensive data set on the cattle procurement activities of four large packing plants in the Texas Panhandle from early 1995 through mid‐1996 to examine this relationship at the plant‐level. We find evidence to support the hypothesis that plants that anticipate near‐term future deliveries of captive supply cattle that are high relative to their regional‐market rivals' degrees of reliance on captive supplies tend to pay spot market prices that are below average. The effect, while statistically significant, is relatively small in magnitude, however. [EconLit citations: Q130, L200] © 2003 Wiley Periodicals, Inc. Agribusiness 19: 489–504, 2003.

Factors Affecting Live Cattle Basis

AbstractCattle producers and beef packers need to understand basis determinants as they develop price expectations and make pricing, hedging, and forward contracting decisions. This study empirically estimated factors explaining variability in monthly fed cattle basis. The five main results regarding live cattle basis are 1) corn price is an important determinant, 2) a change in the value of the Choice-to-Select spread positively affects basis, 3) changes in the levels of captive supplies have no significant statistical or economic impact on basis, 4) the June 1995 live cattle futures contract did not impact basis, and 5) both market fundamentals and seasonal components are important basis determinants.

Captive Supplies, Market Conduct, and the Open‐Market Price

AbstractIn this paper I examine the anatomy of the price captive‐supplies relationship to ascertain if some of the interpretations offered in the empirical literature are defensible. Gardner's one‐product, two‐input model is extended to consider a partially integrated oligopsonistic industry. The main result is that, although the empirical relationship between captive supplies and the price received by independent producers is negative, it may or may not be attributed to noncompetitive conduct. Hence, for an econometric model to detect what type of conduct the relationship reflects, more structural detail is needed than what so far has been provided in the literature.

The Economic Lot and Delivery Scheduling Problem: Powers of Two Policies

We investigate the problem of simultaneously scheduling the final production line of a captive supplier and the delivery of components produced on that line to an assembly facility that uses these components at a constant rate. The supplier incurs a sequence-independent setup cost and/or setup time each time the production line is changed over from one component to another. On the other hand, setup costs and times for the assembly facility are negligible. We consider two types of delivery costs: a fixed charge for each delivery, and a fixed-charge-per-truck cost. We develop a heuristic procedure to find a cyclic production and delivery schedule with the power-of-two property. That is, in each cycle, each component is produced 2μ times for some small integer μ, where the value of μ may differ across components. In addition, several equally-spaced deliveries occur in each cycle, where the number of deliveries is equal to the least common multiple of the component production frequencies. The objective is to find the schedule that minimizes the average cost per unit time of transportation, inventory at both the supplier and the assembly facility, and setup costs at the supplier. Computational results suggest that the heuristic performs well in an absolute sense, and that significant savings can be achieved by using coordinated production and delivery schedules rather than approaches in which they are decided sequentially. The results also indicate that in many situations, pure just-in-time policies (in which production and delivery frequencies are equal) are far from optimal. Our model provides a basis for determining the type and extent of improvements needed in the quest for just-in-time.

The economic lot and delivery scheduling problem: models for nested schedules

We investigate the problem of simultaneously determining schedules for the production of several assembly components at a captive supplier and delivery of those components to the customer. We consider situations in which production economies of scale in the form of setup costs and/or setup times make it desirable for the supplier to produce in batches that are larger than the desired order quantity of the customer. The objective is to minimize the average cost per unit time of transportation, inventory at both the customer and the supplier, and, where applicable, setup costs. We develop a heuristic solution procedure and a lower bounding approach for this problem. We also report experimental results that indicate that the heuristic provides solutions close to the lower bound in most instances. Our results provide a means to answer the often-asked question of whether just-in-time suppliers are (or should be) asked to hold inventory for their customers, and the question of how much setup costs and setup tim...

Short-run impact of captive supplies on fed cattle prices (1992)

Factors affecting western Kansas fed cattle prices during May through November 1990 were investigated. In particular, the impact of changes in captive cattle supplies on cash prices was examined. The term captive cattle supplies refers to cattle procured by a packer well in advance of slaughter. Captive supplies take one of three forms: 1) packer-owned cattle, 2) cattle procured on forward contracts, and 3) cattle procured under formula price (or marketing) agreements. Captive supplies were defined as cattle procured under forward contracts or formula price agreements, because data on packer-owned cattle were unavailable. Over the May through November 1990 period as a whole, the presence of captive cattle supplies was associated with an average reduction in western Kansas cash market transaction prices of about $0.15/cwt.