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MD VIEWPOINT
44,3
The value of the manager in the
value chain
442
Stan Glaser
Sydney Graduate School of Management, Sydney, Australia
Received October 2005
Accepted November 2005

Abstract
Purpose – It is argued that the management of the diverse commercial imperatives of the
participants in the value chain is partly achieved by negotiation. Seeks to describe the mechanism by
which negotiation achieves satisfactory outcomes, capturing ome of the strategic financial impacts by
the cash conversion coefficient and its derivative, the velocity of money.
Design/methodology/approach – An analysis of the ways in which negotiation contributes to the
mutual benefit of partners in the value chain.
Findings – It is demonstrated, using the metric of money, that both parties can be better off, and
shows the “value” they bring to the partnership.
Originality/value – A demonstration of why market-based, negotiated outcomes leave both parties
to a transaction better off. Inter alia introduces the concept of the velocity of money in an industrial
context.
Keywords Value chain, Negotiating, Cash, Money
Paper type Conceptual paper

The value chain, quite correctly, identifies a complex series of activities that
coordinate the nexus between supply and demand. In contrast to economic theory
the value chain is concerned with the diverse activities that manage the demand
and supply curves. As texts on microeconomics would have us believe, these curves
do not simply “happen”, nor does price spontaneously emerge from their crossover
point. Managers bring demand and supply to the market. Underlying this is a
motivational dynamic that underscores the functionality of markets – that is, it
explains why markets “work”.
The complementarity between the motives of buyers and sellers is so obvious it is
surprising its pivotal role in generating market efficiency is largely overlooked. By
definition, buyers and sellers enter the market with different economic and social
motives. Buyers enter the market to acquire and sellers to dispose. So there is a
“natural” symmetry between the forces which bring both parties into the marketplace.
Indeed the market primes participants to exchange[1]. If buyer and seller are free to
communicate, exchange fails to occur under only one condition – that is, there is an
inability to match the criteria for value that seller and buyer bring to the market.
Superficially, such an explanation for a failure to exchange appears to be tautological.
Management Decision However, in practice there are reasons for this failure that are worth exploring.
Vol. 44 No. 3, 2006
pp. 442-447 In mass markets the sellers busily conduct market research to determine the buyers’
q Emerald Group Publishing Limited
0025-1747
value criteria. Because these markets are at arm’s length the traditional market
DOI 10.1108/00251740610656304 dialogues between buyers and sellers are generally absent. To overcome this, sellers
bring all the technology of market research to determine buying patterns, market The value of the
segments, response elasticities and so on. In some markets, such as fast-moving manager in the
consumer goods, the ability to describe and predict market movements has become
quite sophisticated. But this is a side issue to a phenomenon that is generally value chain
characteristic of all buyer-seller exchanges. This is the information asymmetry
between the two parties to the exchange – the buyer and seller. To put it simply, in
terms of the stock of knowledge that buyers and sellers bring to the transaction, the 443
advantage rests with the seller. Sellers know much more about buyers’ needs, etc., than
the reverse. And to follow on from the notion that buyers and sellers enter the market
with fundamentally different motives, the range of objectives that a buyer wants to
achieve will be different from the objectives a seller seeks to satisfy. The argument can
be extended further to assert that all the participants in the value chain will be part of
the chain for different reasons. Managing this apparently diverse milieu of commercial
and other motives is a key part of the coordination and control of the value chain. It is
the “value” that managers bring to the value chain.
A justified response to the assertion of diversity in motives is that the behaviours of
chain participants should be conflicted rather than cooperative. If this is true, an
important role the manager would play is to mediate this conflict. However, to return to
notion of the complementarity of buyer and seller motives, there is no a priori reason to
anticipate conflict, providing the complementarity can be linked in ways that benefit
(bring value to) both parties. The linking mechanism proposed is negotiation.
To illustrate, we can take procurement as one of the activities in the management of
the supply chain. What is procured is obviously influenced by the value proposition in
the demand chain, i.e. it is driven by the market. But the managers’ immediate task is
to put in place supplier relationship management processes in order to translate the
value proposition into goods and services that the market is willing to pay for. The
example below is contrived, but reflects the principles of the argument.
The issue over which buyer and supplier negotiate are, for the sake of illustration:
.
terms of payment;
. volume;
.
volume discount;
.
packaging; and
.
price.

And here we see the interesting relativities of the issues. Buyers will generally want to
string out payment for as long as they can, while sellers would like to be paid as soon
as possible. In general, volume is more important to a seller than a buyer, particularly if
the seller enjoys economies of scale as volume off takes increase. In turn, as volumes
increase buyers would generally like some volume-related discount. But as the seller’s
costs are dropping with increased volumes, handing some of these economies back to
the buyer should not be burdensome. Similarly, presenting the goods to the market in
an appealing way, via packaging, is important for the buyer’s demand chain but
probably of minor concern to the supplier. So it is the skill in the management of the
give and take of negotiation that provides the “value”.
We can now translate these relativities into different hierarchies of importance for
both the buyer and seller.
MD For the buyer:
44,3 .
packaging;
.
volume discount;
.
terms of payment;
.
price; and
444 .
volume.

For the seller:


. volume;
.
terms of payment;
.
price;
.
volume discount; and
.
packaging.

There has been a translation of the buyer’s general motive of acquisition and the
seller’s motive of disposal into concrete, commercial issues. While this is one of the
most fundamental managerial skills, it is also difficult for practising managers to
implement. Its simplicity is beguiling, because in essence it forces the manager to ask
“What do we want?”. How do we turn our general commercial raison d’être into issues
over which we can negotiate and give us both commercial advantage?
How the trade-offs impact on the value equation is strategically and financially
interesting. To make the mathematics simple, let the “indicator” price be $100. The
buyer insists on a new form of packing for which they are not prepared to pay. In
return the seller insists that the purchaser increases the order size. The cost of package
modification to the seller is say, 0.25 per cent. But because the product is in a mature
market, the buyer’s increased volumes have the effect of increasing the product’s
market share (its increased customer appeal means that the brand can command more
shelf facings at retail level), thus further increasing market share for both buyer and
seller. The seller’s costs have actually dropped by 8 per cent, because of the increased
volume, so the seller is now 7.75 per cent ahead while the buyer has lowered their costs
by the 0.25 per cent, which the seller has absorbed. And the profitability of both buyer
and seller has improved due to increased market share.
The buyer now moves to the volume discount, quite correctly arguing that the seller
should offer some consideration for the additional volumes they have been given. They
settle on 3 per cent, so the buyer’s total cost of acquisition has now fallen by 3.25 per
cent while the seller’s “profit” has increased by 4.75 per cent. And the brand has
increased its market penetration, which is to the benefit of both parties. But for the
buyer to obtain the volume discount the seller is asking for improved payment terms,
at least from the seller’s perspective. Recall that the buyer would, in all probability,
prefer to extend the payment terms from the existing 30 days. The resolution that
benefits both parties is that the buyer pays in seven days but in return receives an
early settlement discount of 2 per cent. Given that the cost of money, for the sake of
argument, is 12 per cent per annum, the net effect of this discount for the buyer is to
double their settlement from 30 days to 60 (that is, each 30-day period “costs” 1 per
cent). The buyer has, in effect, achieved their 60 days objective. The buyer’s total cost
of acquisition has fallen by 5.25 per cent while the seller’s profit increase has been The value of the
reduced to 2.75 per cent. In itself, this appears to be a good deal from both the buyer’s manager in the
and seller’s perspective. But if one adopts a systemic view of the organisation, one that
recognises the interrelatedness of operational decisions, the full impact of this single value chain
transaction becomes clearer. It also shows how finance and broader issues of strategy
are intertwined.
The seller’s cash conversion cycle has decreased from 30 days (which is usually 445
calculated from date of invoice, so can stretch to 60 days) to seven. There is a range of
choices the seller can make with respect to deploying the resulting cash or liquid
assets. These can be held, to eventually fund share buy-backs for example, or spent to
fund growth, working capital imbalances and so on. In line with the logic of the
operating cycle we can define a cash conversion coefficient (CCCo) as:
Time period ðdaysÞ t
¼ < velocity of money ðvÞ:
Cash conversion cycle CCC
In this illustration the plainly obvious answer, if t represents an annual period, is 365/7,
which equates to 52 cycles per annum. That is, in a “frictionless” environment the
capital can be turned over once a week. But the more interesting implication of the cash
conversion coefficient is that it becomes a more tangible expression of the
macro-economic notion of the velocity of money (v).
In broad terms the velocity of money is expressed as total expenditure in an
economy/money stock. Total expenditure can be given by gross domestic product
(GDP), while the stock of money is reflected in a common measure such as M0, M1 etc.
So, a simple ratio (e.g. GDP ¼ $3,000 billion and money stock ¼ $600 billion) gives a
velocity of 5.
There is an enormous literature on measuring v (velocity), its policy implications,
and so on. But for our purposes the value of the CCCo is that it is a measure that is
derived from the behaviour of the firm and as such goes back to early attempts to
measure velocity empirically (e.g. Fisher, 1911). As with all gross measures, such as the
ratio used to calculate velocity, it conceals the variances that go to make up the
measure. And from a policy perspective, what is more important is not the quantum
but the individual variations in the individual observations go to make up the
quantum. One of the more interesting characteristics of Fisher’s data, obtained from a
record of the spending habits of college students, is its wide variation. The notion of a
“typical” velocity, such as that given in the commonly accepted measure, is spurious. It
is a ratio, pure and simple, and what it means for the purposes of economic and
industrial policy is quite another matter.
As was pointed out earlier, the firm has various options before it, which will be
informed by a strategic view, in the way in which the earlier than anticipated cash flow
can be treated. As such, CCCo and v are measures of potential, not of actual behaviour.
Without wishing to belabour the point, the way in which the cash is handled is a
management decision and reinforces the critical role of the manager in the value chain.
Thus, it is not axiomatic to conclude, from the buyer/seller example cited above, that
because the velocity of the seller’s operating cash flow has increased this will be turned
into short-term working capital and hence free cash flow is improved.
While this example is clearly simplistic, the nub of the argument has force. If
participants in the value chain recognise that their objectives are complementary,
MD rather than antagonistic, the process of negotiating to a “deal” can increase the
44,3 strategic and money value of the relationship for both parties. Notice that this has
moved beyond haggling over a “price”. While price is obviously an issue in business
relationships, it is rarely, if ever, the issue. This is not to deny the reality and misuse of
market power (which often takes the form of deliberately forcing price as the only
salient issue) but the customer voice clearly indicates that price is not the most
446 important issue.
If that were the case the market leader would always be the cheapest, which is
plainly untrue (e.g. Toyota is the dominant car brand, but far from the cheapest).
To bring some currency to this claim, Table I ranks what is important to automotive
manufacturers and what is important to suppliers.
The differences in the hierarchies are marked, with only “human capital” being
ranked the same. This pattern is quite typical. But it reinforces the assertion that
negotiation is the path by which both parties can share in the creation of “value”.
Notice that price does not appear in either ranking.
The process of negotiation is a uniquely human quality. It cannot be replicated by
machines. While electronic networks have indeed made huge inroads into the
economics of information management (and reduced costs) it is impossible to replace
the savvy value chain manager with a computer.
The movements in the market place about the nature of “value” as a negotiation
objective are interesting. In some sectors of the economy, such as retailing, price is
again assuming a primary role as retailers try and squeeze their suppliers. On the other
hand, the public sector is firmly going to negotiate contracts based on “value” criteria.
For example, the British Government has moved explicitly to “whole of life” costing
as the basis for procurement. The following quotation is instructive:
Value for money gains are defined as improvements in the combination of whole of life costs
and quality that meet the user’s requirements. They will be secured as a result of positive
action by staff involved in commercial transactions.
The measurement methodologies can be applied to all procurements of goods, services and
works and include those for projects, IT, construction and property; and to any programme
spend where there is a proactive and definable procurement influence.
This methodology should be used by all in central civil government unless more accurate
measurement is available locally (Office of Government Commerce, 2004, p. 3).
The concept of the value chain is an important reconceptualsation for management.
And because it can be tied back to the metric of money (i.e. cash flow) it has important
ramifications for the effective and efficient operation of the organisation. But, as

Manufacturers Suppliers

Brand Product quality


Supply chain efficiency Leadership
Innovation Brand
Human capital Human capital
Product quality Alliances (innovation)
(Alliances)
Table I. Source: Cap Gemini Ernst & Young (2003, p. 3, abridged)
always, one can be captured by the technology and ignore those who implement it (i.e. The value of the
the managers). The argument in this paper is that adoption of the value chain concept
and technology itself is not enough to manage for “value”. What are of critical
manager in the
importance are the negotiated deals between the partners in the chain based on the value chain
logic outlined above.

Note 447
1. Here we assume the context is one that permits voluntary exchange.

References
Cap Gemini Ernst & Young (2003), “The future automotive enterprise: unlocking hidden value”,
Cap Gemini Ernst & Young, Montreal.
Fisher, I. (1911), The Purchasing Power of Money, Macmillan, New York, NY.
Office of Government Commerce (2004), “Value for money measurement”, OGC Business
Guidance, May, Office of Government Commerce, Norwich.

Corresponding author
Stan Glaser can be contacted at: stanglaser@ozemail.com.au

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