Download Managing attraction in customer -supplier partnerships

Managing attraction in customer-supplier partnerships
Managing attraction in customer
-supplier partnerships
Carlos Cordon, Thomas E. Vollmann and Kim Sundtoft Hald
IMD 2005-29
Carlos Cordon
Professor
IMD - International Institute for Management Development
23, ch. de Bellerive, P.O. Box 915, CH-1001 Lausanne, Switzerland
Tel: +41 21 618 0390
Fax: +41 21 618 0111
E-mail: [email protected]
Thomas E. Vollmann
Professor
IMD - International Institute for Management Development
23, ch. de Bellerive, P.O. Box 915, CH-1001 Lausanne, Switzerland
Tel: +41 21 618 0333
Fax: +41 21 608 0111
E-mail: [email protected]
Kim Sundtoft Hald
Doctorial candidate
Copenhagen Business School
Department of Operations Management
Solbjerg Plads 3
2000 Frederiksberg
Denmark
Telephone: +4523722303
E-mail: [email protected]
Copyright © Carlos Cordon, Thomas E. Vollmann and Kim Sundtoft Hald
December 2005, All Rights Reserved
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Managing attraction in customer-supplier partnerships
Managing attraction in customer-supplier partnerships
Cordon, C.; Vollmann, T.E. and Hald, K.S.
Abstract
A company’s performance is increasingly influenced by the effectiveness of its supply
chain, particularly by working with the best suppliers. Similarly, working effectively with
the best customers ensures that the overall value chain will be very competitive. A wellmanaged company, is aware of the need to develop close coordination with key suppliers
and key customers with the objective of jointly increasing value and decreasing cost in
the overall supply chain. Information gathering and model building are the classic tactics
normally used to achieve this result. In this article, we present a third tactic, development
of attraction in dyadic relationships. With some theoretical underpinnings in social
exchange as well as the literature focusing on long-term orientation in customer-supplier
partnerships and customer-supplier partnership value, we have developed a conceptual
model highlighting three major components of attraction: the perception of expected
value gained from the dyadic relationship, the influence of comfort on the effectiveness
of the relationship, and the role of relative dependence perception between the dyad
partners. We then show how these components interact, and finally discuss how one
might better manage the interaction.
Key words
Customer-supplier
Relationships;
Relationship
Management;
Relationship-value;
Comfort; Dependence; Attraction.
1. Introduction
It is recognized that suppliers have a fundamental role in a company’s competitiveness
(Porter, 1986) and the way to manage relations with suppliers has been a major focus of
operations research and practitioners in the last 15 years. Academics and managers have
argued that an advantage can be obtained by creating the winning combination that
leverages resources/competencies in conjunction with selected supply chain partners.
This implies that managing supply chain partners is essential to creating such a winning
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Managing attraction in customer-supplier partnerships
combination. How these dyads (customer-supplier relationships) might create such an
advantage and the dilemmas faced by both, the customer and the supplier is the focus of
this paper.
As we will see below, most of the research has focused on one view: the supplier view (in
the case of marketing research) or the customer view (in the case of operations research);
i.e. the latter on the practices of customers in managing and developing suppliers. By
contrast our research takes the point of view of both the customer and the supplier; in
particular, we want to explore the conditions under which suppliers and customers will
jointly develop the resources (i.e. innovation, engineering) to create a winning
marketplace combination.
On the practitioner side, the traditional focus has been on selecting/managing suppliers.
However, the recent development of supplier councils might be considered as a step in
viewing relations from the supplier’s viewpoint. Interestingly enough some observers
have suggested that a “supplier rebellion” is in the making, based on recent incidents of
vendors not supplying – thereby forcing manufacturers to stop their plants (Cordon,
2005).
Numerous articles have been written on how to enhance inter-organizational
management. Some focus on the management of “organizational environments” in
general (Pfeffer and Salancik, 1978), others concentrate on the management of the
immediate partners of a company using the term “managing the dyad” or the “dyadic
relationship” (Dyer and Singh, 1998; Håkansson and Snehota, 1995), while others are
concerned with the management of networks (Dyer and Nobeoka, 2000; Granovetter,
1973; Powell, 1990), or supply chains (Lambert and Cooper, 2000; Mills et al., 2004). In
this article, we concentrate on the management of customer-supplier or supply chain
dyads.
Several approaches have been proposed by academics and implemented by practitioners
to understand and enhance the performance of supply chain dyads. Whether these are
marketing (i.e. management of customers) or purchasing/sourcing (i.e. management of
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Managing attraction in customer-supplier partnerships
suppliers), there are generally two main approaches: information gathering and model
building. Both approaches intend to maximize control over partner behaviors, using
information and model building to support inter-organizational coordination and
feedback.
Information gathering is concerned with “detection at a distance,” making visible those
invisible actions that affect dyad performance. Tools applied to implement this approach
include access to supply chain partner Enterprise Resource Planning Systems (Jacobs and
Bendoly, 2003); Inter-organizational systems (Christiansen, Rohde and Hald, 2003) and
inter-organizational performance measurement systems (i.e. supplier-customer evaluation
or supply chain evaluation) (Beamon, 1999; Lambert and Pohlen, 2001; Simpson et al.,
2002).
Model building on the other hand is concerned with “representation,” reducing complex
actions to a less complex and more manageable form. Tools applied to implementing this
approach include marketing and purchasing strategies and more specifically customer and
supply segmentation using portfolio models (Fiocca, 1982; Olsen and Ellram, 1997).
Essentially, the supply chain management and purchasing literature has been very
productive on how to manage relations, but always from the customer perspective. It is
not within the scope of this paper to provide a complete literature review. However, we
should mention the seminal work of Dyer (1996) and Dyer and Nobeoka (2000) about
practices in the auto industry, Bensaou and Venkatraman (1995) on information
processing needs and capabilities, Lariviere and Porteus (2001) on incentives in the
supply chain boundaries and Novak and Eppinger (2001) on product design and supply
chain management.
In this article, we focus on a third and less discussed approach to understand and enhance
performance in supplier-customer dyads: Increasing mutual attraction, both from the
supplier and the customer perspective. A recent paper (Chen et. al, 2004) argues that the
supplier viewpoint has been a missing part of the research agenda. Including it is
different in that it rejects the underlying principle of “maximizing inter-organizational
control.” Instead, it focuses on “understanding the partner’s interest and adapting to
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Managing attraction in customer-supplier partnerships
work cooperatively in specific supply chain dyads.” The logic is that by becoming a more
attractive customer and a more attractive supplier, the company’s key dyad partners will
willingly engage in dyad-based resource/competency development. When done right, the
result should provide the company with access to a willing, committed and more
malleable platform of important external resources. But how can an industrial company
become a more attractive partner? And what could a customer expect from becoming a
more attractive partner? To explore this question, we look at establishing clear
knowledge of the payoffs from dyad partner attraction, the mechanisms that influence
attraction, and the managerial actions needed (learning and unlearning) to develop partner
attraction.
We see development of partner attraction as entailing three primary components: Partner
expected value perceptions, partner comfort perceptions and partner dependence
perceptions. Note that all of these are perceptions: they will have different values for
different actors in each company. For example, various people in a customer company
will have different perceptions of the three components as applied to a particular supplier
– based on their unique experiences. A key question concerns the variations in these
perceptions within a company (what we call “alignment”). An even more important
question is how one can improve their attraction: How might the customer improve a key
supplier’s perceptions of the customer’s attraction? Which of the three attraction
components is most important? We explore how these components can be managed or
influenced through a combination of structural – and behavioral adjustments.
The article is arranged as a progressive development of the conceptual model in three
main steps. In section two, we further develop the construct of attraction. Here, we
provide some background on the definition of attraction, its basic dimensions,
mechanisms involved in its construction and application to supply chain management
dyads. In sections three, four and five, we explore each of the three perception
components of attraction: expected value, comfort and dependence. In section six, we
examine how the three perceptual components interact and how important this interaction
can be for the effectiveness of the dyad. This leads to a further discussion: How can one
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Managing attraction in customer-supplier partnerships
best manage the interactions and thereby develop/foster dyad best practices? Finally, in
section seven, we formulate some conclusions and indicate directions for future research.
2. The components of attraction
The concept of attraction is a construct that has meaning between two actors. Whether
these actors are individuals (i.e. colleagues, purchaser-sales representatives, lovers,
husbands and wives etc.) or groups of individuals (i.e. organizations, industrial
companies, supply chain dyads, etc.), the basic mechanisms are similar.
The mechanisms that govern associations between actors have their roots in primitive
psychological feelings of attraction between individuals and their desires for reward
(Blau, 1964). Attraction is the force that helps attach actors to actors on two accounts.
First attraction is a mechanism to establish association based on some desired payoff
(perceived expected value). In this phase of a relationship, attraction acts as a creator, or
as a force to attach two previously unattached actors. Second, attraction acts to continue
and enhance the relationships between actors (to increase the perceived expected value).
Here attraction helps to maintain the relationship and commitment to it, and expand the
association between the actors.
Blau (1964) first defines attraction as a one-sided expectation of reward following from
association.
“Actor A is attracted to actor B, if A expects that association with B to
be in some way rewarding for A”
Thus, perceived expected value is what draws A to B and is the core of the construct. But
association has to be two sided: successful attraction requires both parties to perceive
improvements in expected value. Thus, attraction is the force to drive actors together.
The question is how is this accomplished? From Blau (1964) we find that attraction leads
to attraction in the following way.
“When actor A is attracted to actor B, A wants to prove attractive to
actor B.”
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Managing attraction in customer-supplier partnerships
Thus A needs to be perceived as attractive to B. If A is a customer and B is a supplier
with key competencies, A needs to help B see the payoffs from the association: the
expected value to B needs to be perceived as positive.
One way of establishing perceived expected value is through impression management
(Goffman, 1959). By this, we mean a conscious and active construction of an image of
the association being valuable to the partner in a dyadic relationship. Continuing and
enhancing the association requires that the expected value perceptions be enhanced
through achievements of concrete payoffs.
As noted above, there are three primary components of partner attraction: Actual payoffs
(expected value perceptions) might be the most important component of attraction, but
perceptions of comfort and dependence can play major modifying roles. Let us consider
two examples.
First, consider a customer in a relationship with a supplier where there are almost no
supplier alternatives, or where switching costs are prohibitive. This customer will see
itself as having high dependence upon that supplier. This perceived dependence might
cause the customer either to increase its attraction in the relationship – or to exit the
relationship. If the first choice is made, attraction might be increased through joint work
that leads to enhanced value or comfort – to a greater sense of shared values.
Second, consider a different customer-supplier dyad where there are shared values, a
strong sense of mutual destiny, where operational and social interactions are functioning
with mutual understanding and where dyad measures of performance are continually
improving. Both dyad partners will be comfortable, and there should be good
opportunities to enhance the association (win-win). In this case, the perceived comfort
can dominate issues of perceived dependence. The customer (and the supplier) will feel a
sense of security, that expected value perceptions will continue, and that the dyad will
adapt to situations of need. All of these components of comfort can work together so that
each dyad partner perceives the other as worthy of investments.
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Managing attraction in customer-supplier partnerships
However, many supply chain dyads include adversarial relationships, which influence all
three primary perception components (expected value, comfort, dependence). In the
extreme case of major American auto manufacturers, the relationships with suppliers
have become largely poisoned (Liker and Choi, 2004). For the suppliers, there is little
comfort perceived, a strong sense of dependence and perceptions of lowering expected
value as the customers make unilateral demands for price reductions – coming at the
expense of supplier margins.
We summarize our thinking about the three components of attraction in the following
equation:
Partner’s Attraction = F [P[Expected value]; P[Comfort]; P[Dependence] ]
Where:
ƒ
F[y] is the supply chain partner’s attraction function towards the dyad partner in
question.
ƒ
P[x] is the supply chain partner’s perception function towards the outcome of x.
Thus, any company (i.e. supplier or customer) can increase the attraction of a supply
chain dyad either directly by increasing the payoffs (expected value dimension) or
indirectly by affecting the criteria that determine perceived comfort and perceived
dependence. But the attraction of one dyad partner also needs to be seen through the eyes
of the other – and the relationships might involve many different actors. These different
actors might have very different perceptions of the attraction of the other party in the
dyad. This is what we have called, alignment.
3. Dimensions of partner perceived expected value
The expected value of a dyadic relationship has been defined in different ways by
previous research.
First, expected value can be defined tightly as output/input, but this does not count for the
highly individual perceptions that underlie what one firm thinks it gains from working
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Managing attraction in customer-supplier partnerships
with another. A better definition is the perceived trade-off or ratio between multiple
benefits and sacrifices that is gained through a partner relationship (Monroe, 1991).
Stated differently it is a comparison between “what you get” or expect to get and “what
you give” or expect to give (Zeithaml, 1988).
Second, an additional distinction can be made between expected value creation for each
dyad partner, for the dyad jointly, and the expected value made possible due to
connections with further links in the supply chain. The conceptualization of expected
value and the distinction between inside/outside the dyadic relationship have been
referred to as the first order/second order function (Håkansson and Johanson, 1993), the
primary-/secondary function (Anderson et al., 1994), direct/indirect function (Walter et
al., 2001; Walter et al., 2003) or as efficiency/effectiveness/network functions (Möller
and Törrönen, 2003) of a relationship.
We take a comprehensive approach to dyad value determination. First, as noted, our
focus is always based on perceptions – which are individual as well as organizational
(even if the organization does not formally define value). Second, we see expected value
as being perceived through different lenses: There are customer perceptions – based on
what the customer sees as important; there are supplier perceptions – based on a differing
set of criteria; and there are joint – or dyad perceptions of value, but only in enlightened
dyads, where joint value creation is understood (Zajac and Olsen, 1993). Third, we see
attraction as being determined by these perceptions of value, but modified by perceptions
of comfort and dependence. In Table 1, we highlight the components of each of these
constructs.
<<Insert Table 1 here>>
Let us now turn to a more detailed analysis of expected value components.
Cost reduction is concerned with bringing value to the customer by reducing the total
cost and enabling the customer to compete on selling price. Ideally, cost reduction is best
achieved by taking cost out of the supply chain, not by improving the customer prices at
the expense of supplier margins (which has a deleterious impact on comfort). Walter et
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Managing attraction in customer-supplier partnerships
al. (2003) describes what they call “the cost reduction function” from a customer
perspective. This activity focuses on the supplier’s ability to provide the customer cost
reduction potential. The ability is largely achieved by the supplier reducing the amount of
money spent on its goods and services through various activities (e.g. concentrating
volumes, standardizing inputs, reengineering products, etc.) In fact, the best source of
cost reduction is to focus on those costs that can be reduced by a joint focus on dyad
costs: For example, inventories kept by both supplier and customer – where one single
inventory can suffice.
Often, in today’s supply chain environment, squeezing suppliers for cost reductions is the
rule – how the suppliers live with this demand is their problem. In a qualitative study
based on interviews, Ulaga (2003) identified annual price decreases as the most important
aspect in buyer-supplier relationships. In the same study the supplier’s ability to help the
customer take out supply chain cost is also considered a valuable (but not as critical)
asset. Rarely do we find literature where it is the customer – who helps the supplier take
out supply chain cost!
Time compression is about bringing value to the customer through higher market
responsiveness, both in product development and in supply chain execution (MasonJones and Towill, 1999). Time-to-market, response to unexpected end customer demands
and reducing inventory investments all require time compression and coordinated dyad
planning. Ulaga (2003) discusses the supplier’s ability to help customers reduce time-tomarket and identifies three phases in product development where this can be achieved: In
the design phase; in the prototype development phase and in product testing/validation
phase (Ulaga, 2003). We supplement this thinking on time compression value by arguing
that time compression in the supply chain can be equally important to that of product
development. Time compression in the supply chain directly results in supply chain
inventory reductions – and potentially to reductions in the Forrester/bullwhip effect
(Forrester, 1961).
Innovation is creating value for the customer by improving their product portfolios. This
is achieved both by improving existing components and products and by developing new
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Managing attraction in customer-supplier partnerships
ones. A supplier’s proactive ability to develop new (or improve existing) products, is
seen as valuable by their customers (Ulaga, 2003, Walter et al., 2001). Also innovation
can be valuable for the suppliers by improving their technological competencies as well
as their ability to transfer knowledge (Walter et al., 2003). Finally, although innovation is
often perceived as a key source of customer expected value, it is often not uniformly seen
as such throughout the customer organization. It is quite common that engineers will have
different perceptions than those more directly related to product costs or to factory
operations. Thus, there can be a lack of alignment in a company as to the perceived value
of innovation.
Access to new partners is bringing value to the customer by improving the offerings in
its supply chain. This allows the customer to increase its customer base – and perhaps to
work with new suppliers as well. A similar argument can be made for the supplier: an
effective supply chain dyad should provide the supplier with improved competencies that
can be leveraged with new customers (and perhaps with existing/new suppliers). Walter
et al. (2001) and Walter et al. (2003) describe what they call “the market function.” “The
market function” is concerned with the supply chain partner’s ability to connect the dyad
to new potential business partners. These partners can be other relevant suppliers or
potential customers. For example, one of the dyad partners has a prestigious brand name
that can help attract new customers or suppliers. Further by sharing experience in dealing
in new market areas (such as regulated markets), a supply partner can help open doors for
its dyad partner (Walter et al., 2001).
This concludes the discussion of customer expected value dimensions. Let us now turn to
expected value for the suppliers.
Volume is probably the primary source of increased value for suppliers, since in many
cases the customers can rationalize their product line, and reduce their supply base,
thereby concentrating their volumes on a smaller number of suppliers. This in turn can
have an immediate impact on cost reduction: The customer has fewer suppliers to
manage, transaction costs are reduced and the supplier can often afford to offer a volumebased cost reduction. We find that many well-run companies are able to rationalize their
product line – reducing the number of items they purchase by about three quarters. They
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Managing attraction in customer-supplier partnerships
are also able to reduce the number of suppliers by an equal amount. This results in a
potential 16-fold increase in volume per supplier.
Growth is the secondary source of perceived value for suppliers. A supplier is generally
happier with a customer that is growing than with the opposite case for two main reasons:
the first is the obvious expected growth in supplier sales, while the second has to do with
amplification. Growth is important to suppliers; if the customer sees little or no growth in
the items currently being procured from a supplier, this might lead to a decrease in
perceived customer attraction by the supplier.
Learning is the last of the three dimensions of supplier expected value. Learning applies
equally to the customer (Dyer and Hatch, 2004). Essentially, a customer is very attractive
if the supplier, in working with this customer, develops new competencies that can be
leveraged in other dyad relationships. This value is not only for the suppliers. A customer
might compare the competencies of its best suppliers, learning and leveraging this
learning with other suppliers. The greater the partner investments in the inter-firm
knowledge sharing routines and the greater the partner specific knowledge absorptive
capacity, the greater the potential for relational rents (Dyer and Singh, 1998).
Competency development is best seen as a dyad based source of expected value. This is
because there is competency development in the dyad itself (Møller et al., 2004): The
whole can and should be more than the sum of its parts. The example of Procter &
Gamble working with Wal-Mart is a good illustration. Both firms have gained new
competencies by working together and these competencies are not easy for competitors to
copy. Joint competencies are very difficult to imitate. In fact, these joint competencies are
so difficult to duplicate that it took many years for Wal-Mart to be able to replicate them
with other suppliers. Joint competency development resides in the dyad – developed
jointly.
4. Dimensions of partner perceived comfort
We argue that comfort in a dyadic relationship has a moderating influence on the
expected value perceptions of the dyad partners. When the comfort level is high, the
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Managing attraction in customer-supplier partnerships
resultant attraction of the dyad is greater. The reverse is also true. If a dyad partner is not
comfortable, the attraction goes down.
The construct of comfort resembles the construct of trust, but we argue that it better
describes the different dimensions entailed in dyadic relationships and more precisely
that it is a much more flexible and broad construct able to explain individual behavior at
different organizational levels and functions in the two dyadic organizations. Trust on the
other hand has been widely discussed in the literature, but it most often only includes one
dimension. For instance trust has been defined as “a willingness to rely on an exchange
partner in whom one has confidence” (Moorman et al., 1993), as “a generalized
expectancy held by an individual that the word of another can be relied on” (Rotter,
1967) and as “a firm’s belief that another company will perform actions that will result in
positive outcomes for the firm as well as not take unexpected actions that result in
negative outcomes” (Anderson and Narus, 1990).
Comfort is a perception and it is often different among different actors in both dyad
companies. Comfort is highly subjective, influenced by day-to-day interactions. This
means that comfort is subject to rapid change – and negative changes happen much faster
than positive changes.
Comfort is influenced by day-to-day interactions between the dyad partners. For
example, we often see customers delaying supplier payments near the end of accounting
periods to improve their cash position – even when this runs counter to contractual
agreements. Comfort can be enhanced by each partner asking the other: What do I do that
causes you problems? How might we jointly eliminate them?
A more basic problem with comfort comes from changing key players in the relationship.
For example, firms centralizing key parts of their purchasing activities (e.g., price
negotiations, terms, conditions) bring new actors into the dyadic relationship, and usually
the result is to decrease the comfort levels especially in the supplier organization. Some
managers will argue that this might not be a bad result, if “comfort” has become
“complacency” That is, in some cases comfort can be high even though the expected
value for one or both firms is decreasing. In this case the relationship can enter a
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Managing attraction in customer-supplier partnerships
dangerous state of coziness, with competitiveness (expected value) slowly deteriorating.
However, we posit that if the expected value level becomes too low this could encourage
the partner to exit the relationship even though the comfort is high.
On the other hand, if the partner is communicating and supporting the dyadic relationship
to run smoothly on both the strategic and operational levels, there will be a positive
influence on the partner’s comfort and intrinsic attraction. Positive feelings and a sense of
“they understand us” and “we understand them” are generated, and this will strengthen
partner attraction.
We now describe the key components of strategic comfort.
Strategic comfort is concerned with continuation/expansion of the dyadic relationship.
Promoting strategic comfort means ensuring the partner that the business and benefits the
partner
gets
through
the
dyadic
relationship
will
continue/grow,
that
the
continuation/growth will come from joint working and that the partner will get a fair
share of the benefits gained. Strategic comfort is subdivided into five main components:
Credibility; fairness; loyalty, realism, and shared values.
Credibility is strengthening the partner’s perception that commitments are reliable. Thus
if a partner is presumed to be credible, the other party adopts a belief that this partner
“keeps a promise” and does not “let us down.” Credibility is linked to the long-term
orientation of the partners (Ganesan, 1994). Credibility is also tied to consistency across
the various levels/functions in the dyad companies. For example, if the supplier is
promised some level of volume that does not materialize, the credibility of the dyad
suffers. Similarly, if negotiated payment terms are not adhered to, the same result occurs.
Fairness is strengthening one partner’s perception that the other acts in honorable and
fair ways. Fairness is first concerned with how the benefits attained through a dyadic
relationship are divided. When a partner feels its needs are met long term through actions
undertaken by the dyad, the partner perceives fairness in the relationship with its dyad
partner. With this perception of fairness, short-term inequities will be tolerated to yield
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Managing attraction in customer-supplier partnerships
long-term benefits. Fairness is also about the approach developed to deal with the day-today issues of a dyad. Are problems seen as joint problems – or pushed onto one partner?
Will each partner act in the best interest of the other – even if at his or her own short-term
expense (Dwyer, Schurr and Oh, 1987)? Companies perceiving their partners to possess a
reputation for fairness (i.e. partners not terminating relationships and seeking gain at their
partner’s expense) are more likely to adopt a long-term orientation in the relationship
(Ganesan, 1994).
Loyalty is the partner’s perception that the other partner company will be there in times
of crisis. Walter et al. (2001) constructs the safeguard function and states that customers
who are loyal to the suppliers in times of market pressure are more attractive to the
supplier. In a recent example we saw a large electronics firm order materials from a
supplier that would not be needed for at least six months – in order for the supplier to
solve its current fiscal problems. The supplier is very “loyal” and will be supportive of
this electronics customer in almost any joint endeavor. On the other hand, we witnessed a
mobile phone company that magnified its own downturn in sales dramatically for several
of its key suppliers – in some cases resulting in no orders for many months. The suffering
was not forgotten.
Realism is acting in a realistic manner towards the partner. Realism implies for example
not making unilateral demands that are virtually impossible to satisfy. It requires
investing time into knowing the partner’s inherent capabilities – and helping to manage
within these capabilities. If they are not sufficient, then the realistic dyad partner tries to
find joint ways to break constraints – or to seek joint alternative solutions. Companies
that set impossible high standards for their partners destabilize the relationships in which
they participate and can ultimately make them dissolve (Anderson and Weitz, 1989)
Shared Values refers to understanding of the other partner’s strategy and having
compatible ways of working. For example, if one partner’s strategy is to consolidate,
reduce risks and reduce costs while the other is looking for growth and new opportunities
there will be conflicts when discussing increasing investments.
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Managing attraction in customer-supplier partnerships
This concludes the five main components of strategic comfort. We now turn to the
dimensions of operational comfort.
Operational comfort is about how dyad partners can best support day-to-day operations.
From a managerial point of view, operational comfort implies a joint concern with all
logistical issues in both companies – on a shared basis, rather than treating the
relationship on a purely arms-length basis. It is a shared recognition that the dyad will
work together to meet end customer demands. It often implies a commitment to
performance, to meet on time delivery demands and to help your partner solve logistics
problems, particularly in times of crisis. Operational comfort is subdivided into three
main components: reliability, support and rescue.
Reliability is about fulfilling the promises made to the other partner. In managerial terms,
this is expressed as “flawless execution” (Vollmann et al., 2005). It means for example
making a production schedule that satisfies the demands of the end customers,
coordinating the schedules across the dyad to achieve synergies, and then executing the
schedule: that is, produce and deliver what is scheduled, on time, in full, no errors
(OTIFNE). The result is that each dyad partner can depend upon the other1. Supplier
delivery performance is mentioned as an important aspect of a supplier’s value creation
potential to a customer (Ulaga, 2003).
Support is about being there when needed, and by a combined approach to operational
issues. Implied is a strong sense of joint operational problem solving, particularly in
terms of designing cooperative solutions to new problems facing the dyad. For example,
if a new design is anticipated, involving the supplier in the product design stage can allow
the supplier portion of the new design to better adapt to the particular operational
constraints at the supplier. A supplier’s ability to provide speedy, exact and detailed
information, and fast decision making is a valuable asset to a customer because it might
be required by their customers for information/decisions (i.e. for product change
requests) (Ulaga, 2003). There is a strong social dimension to developing support, as
1
In this way, this component resembles the strategic component of credibility, but it is different in that it
focuses on commitments made in operational day-to-day business.
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Managing attraction in customer-supplier partnerships
defined by Walter et al. (2003): Support is defined as the supplier’s ability to work
cooperatively and supportively with the customer, which in turn will provide the basis for
an attractive dyadic relationship.
Rescue is supporting their customers in crises for the customer sourcing operation
(Walter et al., 2003). Delivery flexibility highlights the supplier’s ability and willingness
to change previously agreed delivery schedules, and this will make them more attractive
in the eyes of the customer (Ulaga, 2003). However, being able to respond to crises has
hidden costs. Usually, the customer who has the highest occurrence of crises is the most
expensive to serve – and will probably need to pay higher prices.
5. Dimensions of partner perceived dependence
As discussed earlier, dependence can play a strong role in making a dyad function more
or less effectively. That is, we argue that dependence has a moderating effect on
perceived expected value and that this effect either can weaken or strengthen the
partner’s overall perceptions of attraction. We see four key dimensions of dependence:
Relative sizes of the dyad firms, the proportion of business done together, “lock-on,” and
alternatives.
Relative size refers to the size of the two firms in the dyad – and as a result their relative
power positions. It is generally said that dyad partnerships work best with firms of
roughly the same size. However, sometimes a smaller firm can have some unique
competency or products that would be especially useful in combination with those of a
larger firm. The key issue here is the extent to which one firm has an advantage over the
other and can use their relative power to create some dependence over the other firm in
the dyad.
Proportion of business done together is a measure of how critical it is to continue
working with this particular dyad partner. A related metric for a supplier is the ranking of
this customer in terms of sales – and for the customer, the ranking of spend on this
supplier. This is a question of relativity/balance. If the two firms are relatively the same
17
Managing attraction in customer-supplier partnerships
in terms of importance to each other, there is less chance that one will attempt to exert
dependence over the other. On the other hand, if one firm represents a large proportion of
business to another – but the reverse is not at all the case, then there can be a perception
of major dependence (which might not in fact be the case – but perceptions are what
counts).
“Lock-on” is an idea that expresses the extent to which a customer – or supplier is
committed to the dyad partner – and the extent to which changing involves high
switching costs. When one dyad partner has significant lock-on to the other, this can
represent a strong degree of dependence. Traditionally, lock-on was seen as something to
avoid; classical purchasing ideas were focused on materials being purchased from
multiple suppliers – and to make these suppliers compete for the business. Today, many
firms are having single suppliers who provide an ever more customized bundle of goods
and services – that uniquely fit the needs of the customer’s customers.
Alternatives A final issue in dependence is the existence of alternatives. There is a great
difference in single sourcing when the customer chooses one of several firms to work
with on an exclusive basis – versus when there is only one vendor that can supply the
products or services needed. In such a case, the customer will feel quite dependent. The
traditional example of lack of alternatives is in operating systems for personal computers.
Most customers dislike having only one supplier – they feel too dependent.
Most current literature on long-term-orientation in dyadic relationships and dyadic
relationship value assumes that a balance in partner dependence or interdependence must
exist as a prerequisite for partners to feel attraction and thus for the partnership to
survive. Kanter (1994) for instance suggests as one of eight criteria for success, that
relationships should be created on a platform of interdependence, where neither can
accomplish alone what both can accomplish together.
In establishing the casual link between balance in dependence and the length of the
relationship, this stream of literature often uses the power dependence theory of Emerson
(1962). It is presumed that when dependence and thus a power imbalance exists the less
18
Managing attraction in customer-supplier partnerships
dependent actor will exploit the more dependent actor, and the more dependent actor (or
company) will be dissatisfied with the relationship. It is argued that imbalanced dyadic
relationships are characterized by less cooperation and a grater frequency of conflict
(Dwyer, Schurr and Oh, 1987).
However, we argue that the basic assumption, that a partner always will exploit a power
imbalance, is not correct. First, it is not a question of whether the imbalance is used to
appropriate an unfair share of the dyad expected value, but rather it is a question of
whether the partners perceive it to be the case. Next, we argue that the consequence of an
imbalance in a relationship should be seen in combination with partner perceived comfort
and expected value. If a partner perceives that strong expected value can be reaped from
the dyadic relationship, and at the same time feels both a strategic and operational
comfort in working with its dyadic partner, then a major dependence imbalance will not
affect its tendency to exploit the relationship.
In the next section, we turn to how to manage dimensions of the three perception issues
in dyad partner attraction: expected value, comfort and dependence. The goal is to
propose mechanisms that dyad partners can use to influence the various dimensions and
to provide some words of warning for how seemingly common business approaches
might lead to serious reductions in the attraction of one’s firm to a supply chain dyad
partner.
6. Managing partner attraction
Following our model, management of attraction to dyad partners is achieved through the
enhancement of the dyad partner’s perceptions of expected value, comfort and
dependence in the dyadic relationship. We further argue that to manage partner
attraction, all of the three constructs must be considered. This is the case, since some
combinations of the three constructs will outperform the others and yield better results in
archiving partner perceived attraction. We have summarized our propositions in Table 2
below.
<<Insert Table 2 here>>
19
Managing attraction in customer-supplier partnerships
This brings us to the question of how to influence the three constructs in the table. We
argue that this question involves understanding the issues and perceptions of each dyad
partner in terms of expected value, comfort and dependence. It is also critical to
understand that perceptions on these issues will vary among different actors in the
companies. It could be the case, for example, that there is a great deal of openness and
trust between technical people in the dyad companies because they have had to come
together to solve particular problems – and they just know each other. But, at the same
time, the perceptions of the sales and purchasing people might be very different.
A prerequisite for influencing partner perceived attraction, is establishing knowledge
about how the mechanisms are formed. We propose four mechanisms to manage partner
perceptions of expected value, dependence and comfort2: investment, adaptation,
communication and institutionalization.
Investment: Kanter (1994) claims that true partners should invest in the relationship,
thereby creating transaction specific ties that bind the relationship together. These should
increase both comfort and expected value. If a partner is perceived to engage in
“transaction specific investments” in a dyadic relationship, these investments show strong
commitment supporting a notion of partner credibility and in this way produce a longterm orientation in the partnering company (Ganesan, 1994). To the extent that these
investments are mutual and joint, shared values, strategic comfort and dependence are
influenced. In a theoretical paradigm supporting transaction cost economics, Williamson
(1975), and Weiss and Kurland (1997) explore the influence of transaction specific
investments/assets in cementing distribution channel relationships. Transaction cost
theory, they argue, holds that relationships are maintained because the parties invest in
relationship-specific capital. The argument goes that such investments are idiosyncratic
to the specific dyadic relationship and thus non-redeployable in others. This increases the
switching costs of potentially replacing an exchange partner (and creates joint
dependency) because the assets are lost forever (Barney and Ouchi, 1986). More
specifically Weiss and Kurland (1997) explore how transaction specific investments on
2
We do not claim that this is a complete list. Instead we discuss the four mechanisms as mere examples.
20
Managing attraction in customer-supplier partnerships
the part of a manufacturing representative (a customer) influence the likelihood that the
manufacturer (the supplier) will terminate the relationship. The results of the research
indicate that when used and balanced properly transaction specific investments have a
cementing effect in the supply chain as such. Finally, the second hypothesis indicates that
the cementing effect can cross several tiers in the supply chain acting as a binding force
cementing whole chains together.
Adaptation: Adaptations can be product, process or business oriented. Making
adaptations in one or more of these areas means that the partner making the adaptation
changes its own ways of working to adapt to dyadic- or partner ways of working. This
can improve supply chain cost performance, delivery performance and further produce a
perception of both comfort and increased partner dependence. Wilson (1995) highlights
product adaptations as one of five criteria for dyadic relationship survival. Day (1995);
Wilson (1995); Dwyer and Tanner (1999); Morgan and Hunt (1994) all point to the
establishment of mutual goals, that is business adaptation in governing mechanism, as a
prerequisite for success in dyadic relationships.
Communication: Intensive two-way communication between the two companies is
defined as the frequent exchange of plans, programs, goals, expectations and performance
evaluations. It is stated that such frequent exchanges of information is critical for
coordinating actions, preventing misunderstandings, resolving disputes and make each
party more confident in the relationship and thus more willing to make an effort to keep it
alive. That is, intensive communication increases operational comfort. Here we would
like to highlight the dyadic exchange of company goals and expectations as especially
important in making the dyadic relationship successful and thus ensuring its survival
(Anderson and Weitz, 1989). This enhances the key variables in expected value.
Institutionalization: Finally, the last of the mechanisms that we will mention in this
article is institutionalization. Institutionalization is contrary to the other three mechanisms
mentioned above, since it is intra-company focused. Its aim is to affect internal
perceptions of supply chain partners by creating an image of importance. Stated
differently, it is about establishing a top management vision and a company culture where
21
Managing attraction in customer-supplier partnerships
relationships with suppliers are valued (Kanter, 1994; Day, 1995; Mentzer, 2000). In
essence, institutionalization has an internal focus to understand the inherent benefits of
better supply chain management in general – and dyad relationship management in
particular.
We conclude this section with a framework for the management of partner attraction:
<<Insert Figure 1 here>>
7. Conclusions and Future Research Directions
In this article, we have shown how attraction is an important addition to information
gathering and model building for managing inter-organizational relationships. We have
proposed that partner attraction is built on the perceptions of many individuals in the
dyad companies. These perceptions relate to expected values, comfort and dependence.
The interactions among these three perceptions can be quite complex. Finally, we
conclude that managerial policies can be adopted to influence the perceptions leading to
attraction.
Although resting firmly on a range of both empirical and theoretical based studies, the
argument presented in this article is primarily a theoretical one. We are currently
conducting empirical investigations in two European industrial supply chains. First
indications from these studies indicate that the framework presented in this article is
largely confirmed. We expect to follow this article with one based on empirical
observations, which should have more meaning for practicing managers.
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Managing attraction in customer-supplier partnerships
27
Managing attraction in customer-supplier partnerships
Expected Value
Comfort
Customer Focus
Supplier Focus
Dyad Focus
•
•
•
•
•
•
•
•
•
Cost reduction
Time compression
Innovation
Access to new partners
Volume
Growth
Learning
Access to new partners
Competency
development
Strategic focus
•
•
•
•
•
Credibility
Fairness
Loyalty
Realism
Shared values
Operational Focus
Dependence
• Reliability
• Support
• Rescue
• Relative size/power
• Proportion of business
• Lock on
• Alternatives
Table 1: The components of expected value, comfort and dependence
28
Managing attraction in customer-supplier partnerships
Nr
Expected
value
Perceived
dependence
Perceived
comfort
1
High
High
High
Resultant
perceived
Attraction
High
2
High
High
Low
Low
3
High
Low
High
High
4
High
Low
Low
Medium
5
Low
6
Low
7
Low
8
Low
.
Consequent
Action of partner
High attraction, though
concerns about dependence
Will seek to reduce
dependence and/or exit the
relationship.
High attraction.
Will be annoyed about the
partner behavior and find
working together frustrating
High
High
Medium
Should feel a dangerous
sense of coziness and
convenience. Need to jointly
develop the dyad expected
value
High
Low
Low
Will seek to reduce
dependability and leave the
relationship.
Probably not participate in
joint improvement efforts.
Low
High
Medium
Could feel a dangerous
sense of coziness and
convenience.
Low
Low
Low
Will seek to reduce
dependability and/or leave
the relationship.
Table 2: How perceptions of expected value; - dependence and comfort
work in combination to produce perceived attraction.
29
Managing attraction in customer-supplier partnerships
Perceived comfort
Strategic
Operational
•Credibility •Reliability
•Fairness
•Support
•Loyalty
•Rescue
•Realism
•Shared values
Expected value
(Customer)
•Cost reduction
•Time compression
•Innovation
•Access to new partners
Managing dyad
partner attraction
•Investment
•Adaptation
•Communication
•Institutionalization
Customers perceived
attraction
Expected value
(Supplier)
Perceived dependence
•Volume
•Growth
•Learning
•Access to new partners
Suppliers perceived
attraction
•Relative size/power
•Proportion of business
•Lock on
•Alternatives
Figure 1: A framework for making partner attraction manageable
30