Industrial Marketing Management 35 (2006) 481 492

Enhancing the business-to-business supply chain: Insights from partitioning the supply-side
Sunil Erevelles 1, Thomas H. Stevenson *
The University of North Carolina at Charlotte 9201, University City Boulevard, Charlotte, North Carolina 28223-0001, United States Received 28 October 2004; received in revised form 9 February 2005; accepted 27 April 2005 Available online 11 July 2005

Abstract A market orientation has long been established as the key to success in supply chain management. A central concept of this orientation is market segmentation. The concept of market segmentation, however, has primarily been focused on the demand side of the supply chain; its potential application on the supply side has not thoroughly been addressed. This paper extends the purview of the concept behind segmentation by presenting the concept of supply-side partitioning to refer to the management of heterogeneities on the supplier side of the supply chain. Further, the concept of transvectional alignment is proposed for the purpose of simultaneously aligning market segments with appropriate suppliers at all levels of the supply chain by identifying, evaluating, and selecting supply groups that satisfy the demand function(s) of each segment. This paper discusses supply-side partitioning, includes a model for the supply chain utilizing transvectional alignment, and offers implications for the application of supply-side partitioning in the business-to-business marketspace. D 2005 Elsevier Inc. All rights reserved.
Keywords: Supply-side; Segmentation; Business-to-business; Supply-side partitioning; Transvectional alignment

1. Introduction (Sourcing and logistics is) the darkest continent of businessthe least exploited area of business for competitive advantage. Peter Drucker During the last few decades there has been an explosion in the number of articles in the academic and trade literature discussing supply chain management (SCM) and espousing its role as a strategic component in business planning. Today, as more and more companies embrace the importance of an integrated network of firms that efficiently move materials and components through intermediate processing, to manufacturing, to finished goods, to intermediaries, and on to end users, SCM has become a respected management science with a strong and growing body of theory, testable models,
* Corresponding author. Tel.: +1 704 687 4432. E-mail addresses: serevell@email.uncc.edu (S. Erevelles), thsteven@email.uncc.edu (T.H. Stevenson). 1 Tel.: +1 704 687 6171. 0019-8501/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2005.04.005

and empirical research (Lancioni, Schau, & Smith, 2003 p.173). Further, the substantial benefits of SCM have been recognized in recent literature (e.g., Bowersox, Closs, & Cooper, 2002; Closs & Mollenkopf, 2003; Stank, Keller, & Closs, 2001), and many companies have invested heavily in supply chain process improvements (Farhoomand & Ng, 2000). Perhaps one reason for these commitments is that the central themes of the SCM system are cost reduction and the creation of customer value. That is, effective SCM is buyer driven, beginning with an understanding of the buyers needs and working backward from the end user through channel intermediaries, final, intermediate, and component manufacturer, to material suppliers. The focus on a market orientation has long been established as the key to success, not only in SCM but throughout all marketing processes. Combining a customer orientation with the ability to differentiate products and services is largely what separates modern marketing practice from the sales or production orientations of the past.

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Due to the widespread acceptance of the importance of a customer orientation not only to SCM but throughout all of marketing, it could be argued that there are few concepts of greater value or critical consequence to developing effective marketing strategies than the concept of market segmentation. Market segmentation is the very basis of a customer orientation because it is instrumental in refining a firms offerings, pricing, communication, and distribution. Further, it facilitates the efficient utilization of a firms resources, the positioning of its offerings, the building of long-term relationships, and the maximization of consumer satisfaction. Indeed, it has been documented that increased profitability and enhanced market share accrue to marketers who practice market segmentation and product differentiation while controlling costs (Fuller, OConor, & Rawlinson, 1993; Jaworski & Kohli, 1993; Narver & Slater, 1990). While the role of market segmentation in a marketing orientation is intuitively simple, it nonetheless has had and continues to have a tremendous impact on marketing decisions. To a large extent, it has been used to simplify the complexity and heterogeneity of the demand side of the supply chain, so that marketing decisions can better be specified, organized and implemented. It is surprising, therefore, given the usefulness of market segmentation in fostering a customer orientation down-stream, at the demand end of the supply chain, that the literature largely has ignored the application of the concept up-stream, at the supplier end of the supply chain. That is, the concept has been defined and applied very narrowly in the past, because of this demand-side orientation. Yet, the potential for expansion of the concept to improve business-to-business performance in supply-side decisions could be considerable and there have been increasing calls for treating suppliers as customers (e.g., Sheth & Sharma, 1997), for better organizing suppliers (Gahbauer, 1998), and for better harnessing the enormous competitive advantage that can be derived from the supply side of the value chain. The fundamental reason for segmenting consumer markets is the complexity that exists in the marketplace. This complexity is primarily due to the large number of consumers present and the varying characteristics of these consumers. The management of this complexity is a challenge to marketers, and they consequently need to analyze heterogeneities and homogeneities in the marketplace to better focus their marketing activities. A similar situation arises up-channel in the supply chain in many B2B marketplaces. As technology makes products more complex, customers demand increasingly more customized offerings, accelerated product life cycles force firms to constantly develop new products and consequently seek new suppliers, and as hyper-competition in the marketplace demands increasing rates of product improvement, organizations are increasingly compelled to deal with more complexity in the supply chain, both in the number of suppliers and in their varying characteristics. For example, General Electric has approximately 30,000 suppliers (Moo-

zakis, 2001), Boeing has approximately 20,406 (Wilhelm, 2001), Hitachi has approximately 13,000 suppliers, with access to another 50,000 through its E2open network (Spiegel, 2002), and General Motors has approximately 30,000 suppliers, with approximately 9000 members in its supply chain (Gould, 2000; North, 1999). Even though these firms consider their supply chains to be meeting their needs, the reality is that many managers lament that although they know that their supply chains are riddled with waste and generate great dissatisfaction among customers, they dont know what to do about the problem (Fisher, 1997, p. 116), and often fail to exploit the enormous competitive potential of the supply chain. It is the purpose of this paper to improve the theoretical underpinnings of SCM by demonstrating the role that a systematic and scientific understanding of supply-side heterogeneities and homogeneities can play in supplier identification, evaluation, and selection in the supply chain. In so doing, a new orientation, using the concept of market segmentation, deemed supply-side partitioning is proposed. In contrast to the conceptualization of market segmentation (e.g., Dickson & Ginter, 1987; Smith, 1956), which is oriented toward dealing with heterogeneity on the demand side of the marketplace, supply-side partitioning focuses on heterogeneity on the supply side. This paper also advances a concept called transvectional alignment, which suggests that supplier groups across the entire supply chain (consisting of raw material and component providers, intermediate processors, manufacturers, and buyers) aligned for the purpose of exchange, may be more appropriate for building long-term relationships and satisfying needs at different levels in the channel, than the single vector downstream focus usually associated with market segmentation. The paper is organized as follows: The first section offers a review of the existing literature on segmentation and supply chain management. The next section proposes and defines several concepts needed for the development of a theoretical model of supply-side partitioning and transvectional alignment. Next, a theoretical model of supply-side partitioning and transvectional alignment is presented, followed by an illustrative practical application of these concepts in a B2B marketspace. A discussion of the theoretical and managerial implications of supply-side partitioning and transvectional alignment strategy follows, and suggestions for future research are offered.

2. Market segmentation and supply chain management literature review A large body of academic and trade literature on segmentation exists. Smith (1956), in his seminal article, viewed market segmentation as a strategy in which demand was disaggregated and market offerings were adjusted to meet these separate demand functions. From his perspective,

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market segmentation was an activity that was focused down -channel . Later, a distinction developed in the literature between studies that focused on what actually happens in the market and what managers should do to optimize their successthat is, between positive and normative theory. It may be fair to say that the emphasis in the segmentation literature has been on normative issues. Various methodologies (e.g., Grover & Srinivasan, 1987; Mahajan & Jain, 1978; Novak, de Leeuw, & MacEvoy, 1992), bases (e.g., Andreasen, 1966; Haley, 1968; Martineau, 1958), and implementation strategies (e.g., Hakansson & Wootz, 1975; Lesser & Hughes, 1986; Morwitz & Schmittlein, 1992) have been proposed and discussed. The common feature of such studies is their focus on the demand side of the marketplace. In keeping with this orientation, Dickson and Ginter (1987, p.5) define market segmentation as a state of demand heterogeneity, such that total market demand can be disaggregated into segments with distinct demand functions. Business-to-business segmentation (e.g., Rangan, Moriarty, & Swartz, 1992; Shapiro & Bonoma, 1984) has taken the concept further back up the channel, but the focus still has been down-channel, that is, on downstream demand . In short, essentially all of the segmentation studies in the marketing literature are concerned with the sellers perspective and have a down -channel focus. The supply chain literature also echoes this downstream orientation. For example, in discussing the role of segmentation in logistics services in the global supply chain; Mentzer, Myers, and Cheung (2004) analyze the drivers of horizontal and vertical global market segments, that is, downstream segments. Otto and Kotzab (2003) note that the marketing perspective in SCM performance measurement is primarily one of segmenting customers and differentiating products; i.e., a downstream orientation. However, in recent articles there has been an emergence of a subtle shift toward looking upstream in recognition of the role that supplier selection can play in enhancing supply chain performance. For example, Waller, Dabholkar, and Gentry (2000) cite the importance of a market orientation in supply chain performance, calling for more work on the distinction in performance between firms that are simply market oriented and those that use market-oriented supply chains. They view market-oriented supply chains as those that are capable of offering strategic postponement upstream, downstream, and at the distribution level in the supply chain. Another study (Aitken, Childerhouse, & Towill, 2003), looking upstream in the supply chain, notes that supply chains should be engineered to match product life cycle stage, and that a single approach may not be effective. Fisher (1997) suggests that the ideal supply chain must be dichotomized to be consistent with the type of product produced; functional products requiring efficient supply chains and innovative products requiring responsive supply chains. Dyer, Cho, and Chu (1998) specifically refer to segmentation on the supply end of the supply chain, indicating that suppliers can be

segmented into two groups, those that are arms length, where no long-term commitment is involved, and those that are partners, where long-term close relationships are established. They conclude, firms should think more strategically about supplier management and perhaps should not have a Fone-size-fits-all_ strategy for supplier management (p.58 59). Outside the segmentation and the supply chain literature, perhaps the literature that most clearly reflects the upchannel focus of this paper falls under the general area of vendor analysis. Vendor analysis is concerned with the evaluation of alternative vendors in a buying situation. One approach to vendor analysis focuses on multi-attribute models, investigating a set of selected (a priori) attributes whose relative attribute importance has been noted to vary across buying situations and product categories. Lehmann and OShaughnessy (1974), for example, used a fourcategory classification of choice criteria: performance, economic, integrative, and adaptive. Later, Wilson (1994) suggested that there had been a general shift in relative attribute importance, away from price and delivery and toward service and quality. Other vendor analysis studies fall under one of three general models that have been suggested for vendor selection (Giunipero & Brewer 1993; Timmerman, 1987). These three models are the categorical approach, the weighted-point plan and the cost-ratio approach. In the categorical approach , suppliers are categorized on a set of a priori dimensions (e.g., cost, product quality, speed of delivery). The weighted-point plan is similar to the categorical approach, but here each a priori dimension is assigned a maximum number of points based on its perceived relative importance to the buying institution. In the cost-ratio method , evaluative factors are assigned weights derived from standard internal analysis of costs, and suppliers are then assigned performance weights based on standardized evaluative criteria. However, as in the multi-attribute studies, evaluative criteria are determined a priori and are usually concerned with the unique and often economic needs of the immediate customer, with little concern for the specific needs of the buyer further downstream or with relational behavior. In summary, most of the literature on vendor analysis has some common characteristics. First, it tends to be relatively transaction oriented. Second, the perspective is predominantly and immediately up-channel. That is, the decision criteria are usually those attributes of the supplier and/or the product that directly affect the purchaser. Thus, the literature deals with the unique demand attributes related to the immediate transaction and tends to ignore the relational and derived requirements of the purchaser based on other channel members. In contrast to the vendor analysis literature, relational behavior is better captured in the literature on strategic alliances, whose use has grown in recent years, as acquisitions and mergers have often not met expectations (Dyer, Kale, & Singh, 2001). Strategic alliances are often

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used by organizations to perform value chain functions in areas where they are lacking in capabilities or resources (Bretherton, 2003). A well-designed alliance is consistent with the alliances purpose and with the partners interests (Arino & Reuer, 2004). Strategic alliances can be leveraged to achieve business objectives and competitive advantage, block a competitive threat, or mitigate risk (Wakeam, 2003). Consistent with the strategic alliance literature, this paper advocates an approach called supply-side partitioning, to help create a more organized and integrated supply-chain strategy. By proposing the concept of supply-side partitioning, this paper goes beyond the limitations described earlier. It suggests that supply-side strategy must take into account: (1) a wider range of classification variables than purely economic ones; (2) both the unique demand function of a firm (e.g., a manufacturer), as well as the demand derived from downstream buyers; and (3) the demand requirements necessitated by the selection of upstream suppliers. In short, the focus of supply-side partitioning is to provide a means to optimally align the demand functions of intermediate and final downstream buyers with upstream suppliers throughout the supply chain.

3. Conceptual development 3.1. Supply-side heterogeneity Although theoreticians and practitioners of market segmentation have focused almost exclusively on demandside heterogeneity, it is clear that heterogeneity also exists among suppliers. Smith (1956), in his classic segmentation article, recognized the issue of diversity in supply, but the supplier issue has largely been ignored in later literature. Differences in supplier characteristics have been discussed (e.g., Burt, 1989; Hakansson & Wootz, 1975; Lusch & Vargo, 1998), but never in the context of a framework that might be used to benefit channel members and buyers throughout the supply chain. Some firms have informally recognized supply-side heterogeneity when selecting suppliers and building relationships with them. Dell Computer, for example, seeks suppliers that are willing to share sensitive information with Dell about their quality problems and who are willing to match their production schedules to Dells. Boeing, which has numerous external and internal suppliers, favors those who have sophisticated communications systems and can meet required lead times. Eastman Chemical favors suppliers who will share product data, schedules and forecasts throughout the supply chain (Stein & Sweat, 1998). These relationships, however, have evolved without a systematic framework similar to the one developed over the years for demand-side segmentation. While there is an extensive literature on criteria for the selection of suppliers, the process of optimally managing the supply side of the marketplace has been relatively disjointed, arbitrary or ad-

hoc. Consequently, many buyers have been inefficient in their supply decisions, and unresponsive to changing customer needs. On the demand side of the marketplace, understanding heterogeneity among customers helps to better specify, organize and implement a manufacturers marketing strategy. Through a better comprehension of demand-side heterogeneities, manufacturers are able to more efficiently maximize their returns, while building better relationships with buyers. Similarly, through a systematic structuring of supply-side heterogeneities, manufacturers can make better supply-side decisions that maximize their returns, and enhance the quality of their relationships with both downchannel buyers and up-channel suppliers (Erevelles, Vargo, & Horton, 2001). In addition, such a framework may provide a basis for evaluating and modifying overall marketing strategy and benefit theory building. The remainder of this section proposes and defines the concepts on which the theoretical model (in the next section) is constructed. Supply -side partitioning can be defined as the state of supply heterogeneity, where the total supply pool can be disaggregated into groups that may satisfy distinct demand functions in the marketplace. Supply-side alignment strategy is defined as the use of information from supply-side partitioning to design a program to exploit the unique characteristics of suppliers to satisfy the distinct demand functions of a firm. Supply-side partitioning is positive in nature, concerned with actual conditions in the marketplace, while supply-side alignment strategy is a normative issue of strategic concern to a channel member. Since supply-side partitioning refers to a marketplace condition (consistent with the terminology on segmentation proposed by Dickson and Ginter (1987)), it need not be viewed from the perspective of any single channel member. Rather, supplier groups inherently exist in the marketplace and may be relevant to multiple up- or down-channel members. This notion differs from traditional views of segmentation, where market segments are implicitly assumed to exist down-channel, and only relevant to a channel member immediately higher up in the channel. The normative nature of supply-side alignment strategy, however, requires a reference, or focal point in the channel, from which perspective, strategic and tactical decisions can be made. To better understand the concept of supply-side alignment strategy, and to distinguish it from demand-side segmentation strategy, the concept of the focal firm is now introduced. 3.1.1. The focal firm All firms deal with both supply and demand. Economic exchange occurs when supply meets demand. Different types of exchanges take place at different levels in the channel. From its own perspective, each firm in the supply chain is the focal firm, whose goals are both self-serving, as well as altruistic to its partners in the supply chain. A

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major goal of each (focal) firm is to create and sustain longterm relationships, both up and down-channel. (Upchannel and down-channel are relative terms from the reference point of any firm in the supply-chain.) To achieve this goal, the focal firm must make both up-channel and down-channel decisions. The concept of supply-side alignment strategy and demand-side segmentation strategy can best be understood and distinguished from each other, if viewed from the perspective of a focal firm. In some cases, the focal firm is the final target market. In other cases, its demand function is partially derived from target markets further downstream. 3.1.2. Transvectional alignment strategy The theory and application of market segmentation in most past literature has implicitly assumed a somewhat myopic transactional view of the supply chain. That is, relational behavior (e.g., Lusch & Brown, 1996), based on interdependencies among channel partners that could result in long-term collective gains for all channel members, has largely been ignored in the segmentation literature. Moreover, there is no model in the literature that provides a consistent basis for analyzing upstream supply in the context of downstream demand, aligning supply at different levels of the supply chain with customer demand, or changing upstream supply with changes in customer demand. Consider a channel consisting of suppliers, intermediaries, manufacturers, and customers. If demand at one level in the channel is partially derived from a subsequent downstream level, then demand is derived from all subsequent downstream levels of the supply chain. This is because the demand function of any member in the supply chain is partially derived from its next immediately downstream partner, whose demand function, in turn, was partially derived from the next immediately downstream partner. Similarly, if supply-side partitioning involves the categorization of upstream suppliers, and if the offerings of upstream suppliers are a partial function of their respective categorization of suppliers further upstream, then segmentation is a function of the offerings of all upstream suppliers. Thus, an appropriate, comprehensive approach to strategic supply chain management requires taking into account the downstream demand beyond the immediate customer, while taking into account the upstream supply beyond the immediate supplier. This trans-supply-chain perspective is deemed transvectional alignmentbased on the notion of transvections suggested by Alderson and Martin (1965). Application of this perspective results in a transvectional alignment strategy. The implication is that a firm is not just partnering with its immediate supplier in producing a product for the immediate downstream customer. Rather, the firm is in a partnership with all upstream suppliers to conglomerate resources, as well as with all downstream users of the offering in its various derivative forms.

A transvection is defined as the outcome of a series of transactions, including the complete sequence of exchanges, and the various transformations that take place along the way from source to final buyer (Alderson & Martin, 1965). In a transvectional approach to segmentation, a firm views the entire channel simultaneously, as opposed to concentrating on just its immediate transaction. The focus is on partnerships among all channel members for collective mutual benefit, as opposed to exchanges observed from an individual point of view. Transvections are characterized more by long-term relationships than by short-term transactional exchanges. Transvectional alignment strategy is based on the premise that since channel members are not isolated from each other and share common goals, the more they integrate their segmentation strategy, the better will be their ability to satisfy demand in the channel.

4. A theoretical model of supply-side partitioning and transvectional alignment 4.1. Positive analysis In past literature, segmentation has been viewed in two ways: as a purposeful activity performed by a manufacturer or other seller in relation to the market, or as a more passive phenomena resulting from differential demand for seller characteristics (including products offered) based on buyer perceptions. Dickson and Ginter (1987) identify the latter as segmentation and the former as segmentation strategy and note that segmentation occurs because buyers in the marketplace have different demand functions. From a manufacturers perspective, the buyers demand function is: D f pc ; x1 ; . . . x n ; where: D represents demand for a particular product offered by a manufacturer, p c represents the price offered by the manufacturer to a buyer, andx 1-n represents buyer perceived product characteristics. These demand functions can be thought of as buyer ideal points, and the modes of their distribution represent segments. Thus, segmentation reflects buyer-derived demand, and is consequently a marketplace condition . By contrast, what sellers do in the process of either responding to, or attempting to influence buyer demand, is market segmentation strategy. Market segmentation strategy, then, represents a down-channel perspective. Broadly speaking, it can take two forms. The manufacturer can recognize the existence of segments and differentially position its offerings in such a way as to influence perceptions (product differentiation strategy), or it can try to influence the development of segments by influencing demand functions (segment development strategy). In the proposed supply-side partitioning model, the manufacturer is an interim customer that distinguishes

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among potential suppliers based on both its perceptions of supplier characteristics, and the differential demand of its customers. Accordingly, the manufacturers demand function is: Dm gpm ; y1 ; . . . ; yn ; pc ; x1 . . . ; xn ; where: D m represents demand from the manufacturer for a particular offering by an individual supplier,p m represents the price offered to the manufacturer by the supplier,p c represents the price offered by the manufacturer to its customer,x 1-n represents customer perceived product/manufacturer characteristics, andy 1-n represents manufacturer perceived product/supplier characteristics. In other words, the demand function of the manufacturer reflects the unique demand function of the focal firm, and the derived demand from its customers. (See Fig. 1). More generally, Df g pf ; y1 ; . . . ; yn; ; Dc ; where D f is the demand function of the focal firm and D c represents downstream demand. The focus of supply-side alignment strategy concerns the optimization of supply to meet this demand function for a focal firm. The traditional view of segmentation could be extended up the supply chain, resulting in what might be viewed as transvectional demand-generation, as opposed to the more transactional demand-based segmentation discussed by Dickson and Ginter (1987). For example, taking into account a supplier, manufacturer, and customer, the generalized transvectional demand function becomes: Di f pi ; yi ; . . . yk ; Di1 ; . . . Dn ; where: D i represents the demand function of an individual channel member,p i represents price offered by an upstream channel member,y 1-k represents perceived product characteristics by the individual channel member, andD i-1, . . .D n represents the demand functions of successive downstream members of the supply-chain. Supplier groups at different levels of the channel can thus be identified and partitioned a priori. Because of a better defined supply side, the whole supply chain can be taken
Aggregate Demand of Focal Firm, X=Derived Demand+Unique Demand Qm= g(pm, y1,,yn, pc, x1,,xn)

into consideration simultaneously, and transvectional alignment strategies can be developed at all levels of the channel to optimally satisfy demand in the channel. Reactions to changes in demand can also more efficiently be facilitated at various levels of the channel, because supplier groups at all levels of the channel have already been identified and partitioned. A dynamic model can be established to continuously monitor supply and demand, so that a manufacturers transvectional alignment strategy can constantly be optimized. A transvectional exchange is best exploited when it simultaneously optimizes the demand functions of all the parties involved. This notion suggests that exchange should be viewed as a collaborative (Spekman, Kamauff, & Myhr, 1998) effort across the supply chain. This collaboration is dubbed transvectional partnering , a term consistent with, but more extensive than the notion of supplier partnering (e.g., Anderson & Narus, 1991, Ellram, 1995, Spekman et al., 1998). The proactive optimization of the joint-demand function is transvectional alignment strategy. 4.2. Normative model A marketplace is defined as a region from which goods can be bought and sold (Websters English Dictionary, 1999, also see Buzzell, 1999). It is suggested that, in some cases, the term marketspace may be more appropriate than marketplace, as it transcends geographic limitations, and also encompasses electronic marketing activities (Rayport & Sviokla, 1994). The focus of the marketing concept has been on determining and satisfying the needs of a buyer (Kohli & Jaworski, 1990; Levitt, 1975, Slater & Narver, 1998). Generally, a marketer devises a market segmentation strategy to proactively divide consumers into groups with similar demand functions. In doing so, it aims to minimize within-group variance and to maximize betweengroup variance. The relatively homogenous groups are referred to as market segments. The marketer then evaluates the opportunities associated with each segment, and chooses one or more segments as its target market(s). Based on the offerings required to satisfy the demand functions associated with each relatively homogenous group, the marketer then selects suppliers. This paper suggests that the efficiencies associated with such a process may be sub-optimal for various reasons. First, vendor analysis, primarily transactional in focus, is concerned with the evaluation and selection of alternative vendors in relatively isolated buying situations , rather than on an a priori understanding and optimal grouping of suppliers along various dimensions. Second, a wide range of variations exists in the evaluation and selection of suppliers. Third, the various activities of the manufacturer on the supply and demand side are often disjointed from each other, which may result in a misalignment of demand segments and supplier groups. A transactional approach, characterized by separate up-channel and down-channel

Aggregate Demand (Qm) of focal firm

Customer Demand Focal firm's derived demand (e.g., product attributes, price)

Focal firm's unique demand (e.g., technology, credit, price, etc.)

Fig. 1. The aggregate demand function of a focal firm, X.

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transactions is often the norm. Even if relational approaches are practiced, up-channel and down-channel relationships are often independent of each other. Fourth, many manufacturers selectively withhold customer information from their suppliers. In some cases, this information is treated as a trade secret or competitive advantage in the supply chain. Fifth, the manufacturer often places the interests of the supplier below the interests of the customer and itself. For all these reasons, the flow of offerings in the supply chain may be less than optimal. A better way of managing supply and demand exists through the broadening of market segmentation theory through the use of the concepts of supply-side partitioning and transvectional alignment. The relevant participants in the marketplace include (i) the focal firm, X, (ii) a pool of suppliers and (iii) a pool of customers. The major goal of the focal firm is to optimally align supply with demand in the marketplace . In doing so, the focal firm simultaneously optimizes its up-channel and down-channel decisions, as opposed to separately optimizing them. Stated otherwise, the focal firm simultaneously optimizes the transactional utilities of its suppliers and customers with its own transactional utilities, consequently optimizing the transvectional utility in the channel. This may result in seemingly suboptimal transaction, but an optimal transvection.

application is presented below. This illustration is based on interviews with executives from a full-function solution provider as well as other supply chain members in the marketplace for customized programmable chips. This fullfunction solution provider is identified as the focal firm and is represented by X in Figs. 2 and 3. To achieve the goal of optimally aligning supply with demand in the marketplace, the focal firm, X, should carry out the following steps: 1. The focal firm should first analyze (identify, quantify, characterize and organize) demand and supply heterogeneity in the marketplace at various levels in the supply chain. The marketplace (the dyadic intersection of supply and demand) can be disaggregated into customer segments with distinct demand functions, and into homogenous supplier groups. The former marketplace condition has been referred to as market segmentation, and latter marketplace condition is now deemed supply-side partitioning. Without this basic understanding of the marketplace, it is possible that the focal firm may miss marketplace opportunities, or sub-optimally execute recognized opportunities. 2. The focal firm should then evaluate external opportunities presented on both the demand and supply sides of the marketplace with its own internal capabilities to select potentially relevant demand segments and supplier groups. Once again, this exercise may help highlight potential opportunities on both the demand and supply side that may otherwise be missed. The aggregate demand functions of the focal firm, which represent both downstream derived demand and firms unique demand (see Fig. 1), are then aligned with supplier groups (see

5. Using supply-side partitioning and transvectional alignment strategy: specifying the normative model and an illustrative application To help specify the normative model and to more clearly illustrate the concepts described earlier, a marketplace
Patent-insensitive outsourcers Supplier A Supplier E Supplier F Supplier C Supplier D Patent-sensitive outsourcers Patent-insensitive outsourcers Supplier E Supplier F Supplier A Supplier B Technology developers Supplier B Technology developers

Segment 1: Mobile phone manufacturers

Focal Firm
(Full-function solution provider X)

Focal Firm
(Full-function solution provider, X)

Supplier C Supplier D Patent-sensitive outsourcers

Segment 2: Digital camera manufacturers

Fig. 2. Supply-side alignment strategy: the alignment of supplier groups with demand segments.

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Sub-component & Raw Material Suppliers

Component Suppliers

Branded/ Unbranded Manufacturers

2

Industrial Buyers

2 Knowledge Workers Technology Developers

1 Full-Function Solution Providers 2 Mobile Phone Manufacturers

1a

Customized Cookie-Cutter 1 Suppliers

Patent-Sensitive Outsourcers

Proprietary Chip Manufacturers

Digital Camera Manufacturers

Low-Cost Generic Component Suppliers

Patent-Insensitive Outsourcer

Non-Proprietary Chip Manufacturers

Computer Manufacturers

Fig. 3. Transvectional alignment strategy for customized programmable chips.

Fig. 2). More simply, a firms demand segments are aligned with appropriate supplier groups to create the firms supply-side alignment strategy. In the illustrative example in Fig. 2, aggregate demand derived from downstream mobile phone manufacturers is aligned with patent-sensitive outsourcers, while aggregate demand derived from downstream digital camera manufacturers is aligned with technology developers. 3. The focal firm should then evaluate potential individual supply groups and demand segments that may potentially form trans-intermediary alignments called transvectional alignments . A transvectional alignment can be thought of as a series of coordinated strategic alliances, and can be defined as a cross-section of the marketplace, consisting of suppliers, manufacturers and customers, optimally aligned for the purpose of exchange. This involves simultaneously using information about supplier groups, demand segments and intermediaries to determine if a cross-sectional market alignment would be beneficial to all parties involved. Inherent in this analysis is the maximization of customer satisfaction and the minimization of total costs. 4. The focal firm should then use the information about potential transvectional alignments to design a program that optimally aligns one or more supplier groups with one or more demand segments, within the boundaries of its internal capabilities, to satisfy specific needs in the marketplace. This is referred to as a transvectional alignment strategy. The focal firm thus plays the role of focusing potentially unfocused (up-channel) supply to potentially unfocused (down-channel) demand to create a cross-sectional market alignment. This is illustrated in

Fig. 3 by the solid line 1. In this illustration, the focal firm, X, already has patented in-house technology to meet the demand for customized programmable chips from the mobile phone manufacturers. Taking advantage of their knowledge of up-stream heterogeneities, the focal firm instantly aligns this demand with one or more patent-sensitive outsourcers, with whom it has developed up-channel relationships. Simultaneously, this demand is further instantly aligned upstream with one or more low-cost generic component suppliers, as it is known a priori that components for the programmable chips are standard components that are readily available. Ideally, the patent sensitive outsourcers, as well as the focal firm have used their a priori knowledge of supplyside heterogeneities to establish a priori relationships with these sub-component suppliers. A second transvectional alignment is depicted by the dotted line, 2. In this case the focal firm aligns downstream demand from digital camera manufacturers with upstream technology developers and customized cookie-cutter suppliers. Used properly, a transvectional alignment strategy can enhance the advantage of the focal firm in the marketplace relative to its competitors (in this case, other full-function solution providers, proprietary chip manufacturers and non-proprietary chip manufacturers). 5. The focal firm should constantly monitor the environment, and accordingly respond to it by modifying its supply chain strategy to satisfy its customers. The modification of its supply chain strategy could include changes in its demand-side segments, supplier groups and transvectional alignments. This process is dynamic. This is illustrated in Fig. 3, where the solid line, labeled

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1a, modifies the firms original transvectional alignment strategy. As the aggregate demand function of a firm abruptly changes, such that a customized component is required, the transvectional segment can instantly be modified to include one or more customized cookiecutter suppliers (illustrated by solid line, 1a in Fig. 3). The steps described in the theoretical model and illustration are aimed at describing the optimal marketplace environment, the main participants and relationships between them, and the marketing phenomena in question. It should be noted that a small number of successful organizations such as Dell, Boeing, and Eastman Chemical follow some variation of the steps described in the model. Many (if not most) others do not, or do so in an ad-hoc, haphazard manner.

6. Implementation To better address the issue of the implementation of the concepts presented in this paper, a brief case analysis is developed below to illustrate how a company such as Dell can use the ideas developed in this paper to enhance, for example, its mass customization capabilities: Dell is excellent at many key areas of supply chain managementits direct marketing model, its minimization of inventory costs, its speed in production and delivery time, and its cost-effective manufacturing processes. However, there is a general misperception that Dell is also excellent at mass customization. The reality is that while Dell customizes its products, unlike Hewlett-Packard and IBM, Dells implementation of its customization program is limited to common product configurations in order to make the program manageable and cost-effective. In doing so, Dell avoids specialty configurations, and misses out on a number of high-end customers that potentially could generate higher margins. Moreover, the depth and width of its product line has to be kept at a manageable size. Dell almost always sells directly to its customers. Only when a customer places an order does the supply chain process begin. When a new order comes in, a message is sent to a small group of key suppliers, who are located geographically near Dells assembly plant (Fugate & Mentzer, 2004). Suppliers have 90 min to truck their parts to Dells assembly plant (Jacobs, 2003), which has several cargo bays and a thin white line surrounding it. They can neither be early nor late. When a part crosses the white line, a scanner transfers ownership from the supplier to Dell. Dell has designed most of its products so that the components snap into place. Dell does not hold inventory for long, and the entire process from the time the customer places the order to the time the finished product exits the factory is 4 to 8 h (Breen, 2004). The process is efficient, cost-effective and revolutionary in its industry. But Dells product line is limited,

its configurations are limited, its suppliers are limited and focus on standardized components, it caters mostly to mass markets, and consequently its margins are limited. This model may have to be improved on in the future, as many of the products Dell sold in past years are becoming commodities, capable of being produced cheaply by foreign competitors. Dell has realized this, and has moved to new categories such as flat panel TVs, MP3 players, cameras and digital music services (Habert, 2003). To satisfy the growing trend towards mass customization, one strategy for Dell would be to become a true mass customizer, and expand its supply chain to several thousand members. The ideas presented in this paper may be useful in managing this new supply chain. Whereas in the past, Dell sought to minimize complexity in the supply chain to achieve returns, it may now have to manage complexity. Just as it did in the past, its supply chain process would begin only after a customer places an order. However, rather than having a few strategic suppliers in geographic proximity, Dell should now source from thousands of suppliers throughout the world. To manage this increased complexity, they should first identify, quantify, characterize and organize its suppliers at various levels in the supply chain, i.e., perform a comprehensive supply-side partitioning . When an order in any configuration comes in, Dell should align this demand with appropriate suppliers or supplier groups throughout the supply chain, organized through the earlier partitioning. This would be their supply-side alignment strategy. Unlike today, where Dell is criticized for reducing its inventory costs by moving them to its suppliers, in the future Dell would also have to simultaneously reduce the inventory costs of all its partners in its supply chain, as these savings would eventually reflect on Dells own bottom line. Dell should then create trans-intermediary alignments that cut across their entire supply chain for each product and configuration. Depending on the number of unique customizations demanded, Dell could potentially have hundreds or even thousands of these transvectional alignments . This is their transvectional alignment strategy, and can be carried out seamlessly and cost effectively through marketing information and artificial intelligence systems. Dell should constantly monitor its supply-side partitions, and accordingly modify its transvectional alignments to maximize satisfaction and minimize costs. The proposed model thus serves to simplify and categorize what would otherwise be a hopelessly unmanageable task, and help Dell achieve true, cost-effective mass customization. This would help Dell enhance their already substantial competitive advantage over companies such as Hewlett-Packard and IBM, who for most part still use a mass production and traditional channel strategy, and will find it more difficult to satisfy the growing demand for mass customization from its customers.

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7. Theoretical contributions To summarize, this manuscript makes at least four basic theoretical contributions to the literature in the area. First, it proposes that supply chain members should recognize and have a thorough knowledge of up-channel heterogeneities and homogeneities. Second, the knowledge of these heterogeneities and homogeneities should proactively and simultaneously be used in the development of supply chain strategy. Third, a framework that could be used by academics and practitioners in further developing normative approaches to segmentation of the supply market is provided. Finally, the paper takes an initial look beyond transactional segmentation approaches and suggests a transvectional alignment approach, a more strategic framework that has the potential to significantly improve SCM.

8. Managerial implications There are several managerial advantages inherent in using supply-side partitioning and transvectional alignment strategies. A supply-side alignment strategy helps in the precise a priori identification, quantification, characterization and organization of supplier heterogeneities and homogeneities to better satisfy the different demand functions of a firm. In addition, since a firm has in-depth knowledge of the characteristics of its suppliers, it purposefully can shift supply from one supplier group to another to maximize its self-interests or adapt to change. Moreover, this also would help in the more efficient allocation of a firms resources, by shifting functions to the most beneficial supplier groups, and by making the supply process itself more efficient. A better structural understanding of supplier heterogeneities, along with speedy and proper alignment with demand heterogeneities, helps to enhance downstream buyer satisfaction. In addition, changes in the marketplace can be addressed quickly by shifting and realigning demand across different supplier groups, further enhancing downstream customer satisfaction and improving response cycle time. Strengths and weaknesses of channel members can also be better assessed, both relatively and actually in the channel, leading to more optimal decisions in the management of the supply chain. Finally, firms can use supply-side partitioning and transvectional alignment to improve strategic planning, build long-term relationships with their suppliers, create new mutually beneficial relationships between their suppliers and their customers, and with a thorough understanding of their suppliers, create a purchasing strategy that would help them gain a strategic advantage over their competitors.

9. Limitations and future research There are a number of important tasks relative to the concepts presented in this paper that are beyond its scope,

but represent areas where further research is recommended. A key issue is that the normative model has not completely addressed the issue of the partitioning bases or composite bases that may be used by channel members to actually partition the supply market. In part, this is because this elaboration of the normative approach varies with the marketplace situation, and requires input from the actual implementation of these concepts in a particular marketplace. Moreover, complete explication of partitioning bases is withheld from the normative theory because of the lessons learned from demand-side segmentation. That is, attempts at providing universal bases for segmentation have failed on the demand-side for reasons that have been noted in past research (e.g., Dickson & Ginter, 1987; Wind, 1978). First, the bases that often have been identified in demand-side segmentation (e.g., demographics) are actually just surrogates for the demand functions they are intended to represent. Second, despite numerous attempts in delineating the appropriate bases for segmentation in consumer markets, no universally applicable set of bases has resulted. Part of the reason for this difficulty is that decisions concerning the appropriate bases are decision and situation specific. Since the notion of supply-side partitioning assumes both a unique (to the focal firm) demand function and a derived (from the consumer) demand function, these challenges are magnified when devising a supply-side alignment strategy. This is because a segmentation base that may be relevant for the unique demand component of a focal firm may not be relevant for the derived demand component. As the simultaneous optimization of both components may be sub-optimal in relation to each component, the creation of a composite base may be necessary. Moreover, when more parties are involved, the simultaneous optimization of the demand functions of all the parties involved further complicates the issue. Unlike simple cases of vendor analysis, which seeks optimal solutions only based on a subset of variables, supply-side and transvectional alignment strategy requires the alignment of supply with demand. Consequently, the creation of situation- and decision-specific composite bases may be necessary and may not be a simple task. Further research that would specifically examine this issue is needed, before a substantive methodology to universally carry out this process is available. However, the transvectional model introduced here may provide a more solid foundation from which normative theory can evolve. By indicating that demand represents aggregate functions comprising all down-channel demand, demand unique to the focal firm, and contingent demand, a transvectional model implies that at least a tripartite segmentation approach may be necessary. The transvectional model proposed here can thus further be developed. On a different note, attention should be paid to the construct of supplier satisfaction. Customer satisfaction is a central construct in marketing literature (Erevelles

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& Leavitt, 1992). Similarly, employee satisfaction has been studied considerably in the management literature. The issue of supplier satisfaction, however, has not received any such attention. It would be useful for this construct to be studied both theoretically and managerially. An understanding of supplier satisfaction could enhance SCM activities, and collectively benefit all members of the supply chain. Similarly, the concept of supplier positioning could also be explored, thereby applying the concept of positioning further up-channel. In choosing their position suppliers could consider the largest relative advantage they can hold in the supply chain, and differentiate themselves from other suppliers.

tions on earlier versions of this paper. We also thank Professor Peter J. LaPlaca and anonymous reviewers for their helpful suggestions.

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10. Conclusion The introduction of the concept of segmentation in marketing literature by Smith in 1956 has had a substantial impact on marketing thought and practice, and a systematic framework for demand-side segmentation now exists from both a theoretical and applied viewpoint. This does not, however, mean that markets were not segmented prior to 1956. Rather, many organizations practiced segmentation, but did so in an unscientific and potentially sub-optimal manner. The formal introduction of the concept of market segmentation led to systematic thought on the matter, as well as a framework and increasing guidelines for practitioners to segment their downstream, demand side markets. The goal of this paper has been to outline an initial framework to better identify and exploit these potential supply-side opportunities, thereby making a contribution to marketing by facilitating systematic thought and practice about the potential efficiencies and competitive advantages that exist on the supply-side of the value chain. As was the case with demand side segmentation prior to Smiths work, supply segments also exist inherently in the marketplace and firms have used various informal heuristics to select and manage their supply pool for years. This paper provides an initial basis for a more formal and systematic theoretical and managerial framework using segmentation theory as the basis, and advocates taking a system-wide view of the supply chain. This is a substantial advance over current vendor analysis theory and practice. It may thus be a fair conclusion to say that this paper makes a significant initial contribution that may aid in a more efficient exploitation of supply-side heterogeneities to meet demand side opportunities, and, in the process, enhance value creation in the supply chain.

Acknowledgement The authors thank Stephen L. Vargo, Peter Dickson and Gunter Wessels for their helpful contributions and sugges-

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