2.8.7. Acquisition of Production Capability

Lead firms can be very demanding about reducing costs, raising quality and increasing on-time performance. Yet, along with high standards, lead firms can also provide knowledge and support. MSEs learn by observing what their buyers are doing or in other cases, the lead firm will transmit best practices through embedded services or provide hands-on advice on how to improve production processes and producers’ skills. Knowing how a chain is governed helps donors and development practitioners understand how much assistance lead firms are likely to provide their suppliers and which upgrading activities they are most likely to support.

Brazil’s Sinos Valley leather shoe cluster illustrates how the various types of chain governance are characterized by different expectations and requirements of suppliers that in turn, affect suppliers’ potential to acquire production or knowledge-intensive skills. The U.S. and European buyers tightly coordinated their chain linkages through captive relationships with Brazilian suppliers, placing more emphasis on price, quality improvements and flexibility. However, in order to meet these demands, the buyers also facilitated product and process upgrading of the Brazilian suppliers' operations. In contrast, domestic and Latin American buyers maintained market-based governance with the suppliers. These less restrictive relationships enabled the shoemakers to acquire new functions in the chain such as design and marketing (functions that were not encouraged by the U.S. and European buyers), yet these buyers did not provide any support in developing the necessary skills to perform these new functions. [1] This case illustrates the power lead firms have in determining and/or facilitating suppliers’ acquisition of new capabilities.

Footnotes

  1. ↑ Bazan, L. & Navas-Aleman, L. (2004). The underground revolution in the Sinos Valley: A comparison of upgrading in global and national value chains. In H. Schmitz (Ed.), Local enterprises in the global economy: Issues of governance and upgrading (pp. 110-139). UK: Edward Elgar Publishing Limited.