Within a supply chain, buyer-supplier relationship might take various forms. Two different schools of thought can be distinguished in literature on business relationship management (Cousins, 2002). The first is the behavioral or humanistic school which compares relationship between firms as relationship between people like a marriage, based on trust, commitment, mutual understanding and cooperation. The second school takes an economical perspective in which relationship between firms based on power difference in size of firms and their economic power in the market.
The author will use transaction cost theory, which is used by many authors for drawing up a continuum of types of relationships between companies in a supply chain, beginning with market transactions and ending at vertical integration (Cox, 1996; Lambert et al., 1996; Slack et.al., 1998; Spekman et al., 1998; Van der Vorst, 2000; Claro, 2003; Verdujin, 2004) (see figure 29). Between these two extremes several types of hybrid relationships differ from author to author, but the characteristics of buyer-supplier relationships overlap to a large extent across authors (Verdujin, 2004).
Figure 29. Continuum of buyer-supplier relationship
Source: Cox, 1996; Lambert et al, 1996; Slack et al, 1998; Van der Vorst, 2000; Claro, 2003; Verdujin, 2004 Spot market Vertical integration Type I Short term focus Type II Long term focus Type III No end of cooperation date Joint venture
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Figure 30. Vertical integration and horizontal integration in a pork chain
Source: drawn by the author
1. Spot market relationships represent market transactions as positioned by Williamson (1985). The fundamental assumption is that trading partners are interchangeable.
2. Type I (short term focus). The firms involved recognize each other as partners, and on a limited basis coordinate activities and planning. The partnership has a short term focus.
3. Type II (long term focus). The firms involved progress beyond coordinated of activities to integration of activates, the partnership has long-term horizon.
4. Type III (no end of date). The firms share a significant level of operational integration and view each other as extension of the own firm. No end date for the partnership exists. Feed producer Pig producer Slaughterhouse Processor Distributor Consumer
Feed producer A Feed producer B Feed producer C
Pig producer A Pig producer B Pig producer C
Slaughterhouse A Slaughterhouse B Slaughterhouse C
Processor A Processor B Processor C
Distributor A Distributor B Distributor C
Consumer A Consumer B Consumer C
V e rt ica l i n te g ra tio n Horizontal integration
Vertical integration: integration of different levels of chain actors
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5. Joint ventures are new created and independent firms separate from the companies forming the alliance. Power in the relationship is based on equivalence.
6. Vertical integration or the merger of parties in (part of the) supply chain. In this case all (or part of the) activities from sourcing raw materials to delivering the products to end consumers and supporting activities are coordinated by one firm.
On the other hand, besides vertical integration, there is horizontal integration among the same level of chain actors (see figure 30).
Spain:
The pork chain governance in Spain has mainly two manners, which are vertical integration and horizontal integration.
Figure 31. Form of chain governance in Spain
Source: drawn by the author
In white pig chain, the vertical integration dominates the chain governance form, 70% of the production comes from vertical integration, 20% of the production comes from cooperatives (horizontal integration) and the other 10% is independent (figure 31). In white pig chain, the main integrators are feed producers of the chain, they started to integrate with their downstream actors of the chain since 30-40 years ago in the form of providing feed and production farm yards to the pig producers, after this first step of integration, they started to integrate with other chain actors such as slaughterhouse and processing industries, through doing this, the integrator becomes a big company that integrates the whole chain from feed producer until cured pork products processor.
The benefits of vertical integration form are:
1) Pig producers reduce their risk in epidemic diseases of the pigs
Vertical integration (70%) Cooperatives
(20%)
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2) Pig producers reduce their risk in the change of feed price
3) Pig producers receive all kind of service provided by the integrator, including veterinarian, technology, information of the market, etc.
4) Integrator is able to control all the process of producing pigs, including feed, selection of breeds, veterans, quality system, technology, information, finance, etc. it is easier for them to trace the quality of the products as well.
In the form of vertical integration, the pig producers become the workers of the integrated company, they lose part of property when they were producing pigs for themselves, they were responsible for all the benefits they got and the risks they faced, but now they don‘t have the property of producing pigs, the risks are transferred to the integrated companies, but the benefits they get also become a fixed part which is their salary that is not related with production of pigs.
In Spain, there are several big integrated companies such as Campofrio, Grupo Alimentaria Guissona, Vall company, ElPozo etc. who have conducted vertical integration successfully for many years, these companies have successfully controlled the safety and quality of their products and make themselves leading companies in the whole Spain. The company Elpozo, which locates in Murcia, south of Spain, is the one of the leading meat industry in Spain. It is one of the typical companies that conduct vertical integration. It has formed its concept of Integrated Process control (IPC) and considers it as its main strength in responding to the needs of consumers and offering products surpass their expectations. It integrates from feed production, veterans, pig production (which includes white pig production, Iberian pig production), slaughtering, deboning, classifying the products into different categories, processing and logistic systems. In the whole process, the company strictly controls the safety and quality of every link, which make it renowned company in Spain with the image of offering products with safety, quality and variety (see figure 32).
Vertical integration achieves its importance in Spanish pork chain for several reasons as follows.
First of all, the risk of feed price makes pig producer in need of a form to share risk. Spain is a country that has a dry climate, which makes it difficult for the country to produce a lot of maize. It imports a lot of maize which is one of the main raw materials to produce feed. For this reason, the feed price in Spain depends a lot on the imported maize price, which raises the risk for the pig producers. To reduce the risk, the farmers
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need a unity that could bear more risk and to be protective.
The second reason is the risk of animal disease. Spain has past pig African fever in 1970s which was transmitted from Africa through the boundary between Spain and Africa, making a lot of loss to the pig producers, at that moment, epidemic risk was serious and the pig farmers were in great need to find a manner to avoid risk, and vertical integration arises from there.
Figure 32. Vertical integration of El Pozo
Source: www.elpozo.es
But some experts view that it is also considerable that external risks (such as economics crisis of the world) will make the big integrators in risk or go bankrupt, it will cause great loss to the whole chain as it is highly integrated with so many years‘ development and so many employers in the integrated company.
But anyway, choosing vertical integration in pig sector in Spain is the problem of risk and history.
Besides vertical integration, the horizontal integration such as cooperatives emerged as another form of integration in pig sector in Spain as for its own advantages. Actually, according to the views of experts, cooperatives dominate the chain integration