Problem Sources in Establishing Strategic Supplier Alliances

Article excerpt

INTRODUCTION

A number of North American firms have established supplier alliances(*) and supplier development programs during the past few years.[1] The supplier alliance concept has been pursued for a number of reasons, including supply base reduction, quality improvement, and a reduction in source variance.[2] At the same time, total quality management (TQM), a system of management whose primary objective is customer satisfaction, has broadened the historical definition of quality to include supply quality.[3] Supply management thus has become a key element in a company's quality strategy, and supplier alliances have been touted as effective means for achieving better results.

Data supporting the effectiveness of strategic supplier alliances have been accumulated; however, most studies have focused on the generalizability of alliances across industries and the potential benefits that can accrue.[4] This study's purpose is to examine a different issue: potential sources of problems in establishing such relationships with suppliers, an area of investigation that has largely been ignored. The study compares perceptual differences between matched samples of buyers and suppliers concerning their interrelationships. Specifically, alliances in which suppliers perceive the alliance relationship less positively than do their buyer counterparts are examined, based on suspected reasons that might lead to the suppliers' lower assessment of their arrangements.

STRATEGIC SUPPLIER ALLIANCES

Prior research has contrasted the alliance style of relationship with the traditional approach for dealing with suppliers, a relationship characterized by low commitment, limited information sharing, and contractual delineation of each party's role. The traditional buyer-supplier relationships involving multiple sources and short-term contracts have been evaluated using transaction costs and risk as determining factors.[5]

While transaction type arrangements are suitable in many circumstances, some authors have suggested that competitive bidding is not the preferred supplier selection method when, among other reasons, issues other than price (e.g., quality or technical capability) are of major concern.[6] Drawbacks to the competitive bidding process have been discussed extensively by a number of authors.[7]

There is growing interest in "new" forms of supplier selection procedures and relationships. Of particular interest are supplier alliances, inter firm transactional bases that expand the buyer-supplier relationship's dimensions. Typically, an alliance is characterized by a buyer providing more information about order quantities and timing, upcoming design changes, long-range plans, and so on, and sometimes about process technology assistance. At the same time, the supplier usually becomes more involved in product design and in providing broader technical support to the buyer. In return, the buyer usually commits a larger share of its business over an agreed period of time exclusively to the allied supplier. Numerous authors have investigated supplier alliances from the dimensions of definitions, activities,[8] and rationale.[9] However, none of these studies have investigated the causes and outcomes of conflict in such relationships.

MATCH AND MISMATCH OF PERCEPTIONS

Depending on circumstances, firms may have differing opportunities and capabilities to establish broader terms for their relationships with suppliers. Therefore, an alliance can be viewed as a matter of degree of mutual involvement. The degree of alliance can be measured by assessing two characteristics that are considered hallmarks of the nontraditional arrangement:(1) the amount of joint problem solving and (2) the equality in benefit sharing that occurs.[10] Firms reporting higher levels of these characteristics are considered to have greater degrees of alliance.

Measuring the degree of alliance in this way can also reveal problems in the purchasing arrangement. The views of both buyer and supplier can be sought independently and compared. There are three possible outcomes from buyer-supplier comparisons. First, the supplier and buyer may agree on the degree of alliance that is present, regardless of whether it is high or low. Second, the supplier may see a strong alliance, but the buyer may not believe that such an alliance exists. Third, the buyer may see a strong alliance, while the supplier believes it to be otherwise. The perceptual matching can be represented by the matrix presented in Table I.

[TABULAR DATA OMITTED]

The match of the buyer-supplier perceptions - that is, into which cell they fall - might have significant impacts on the purchasing department's effectiveness in dealing with suppliers. If both the purchasing department and its supplier agree that theirs is a low-alliance, traditional-style relationship (lower left quadrant), then each will act accordingly, likely with arms-length, price-driven transactions and little information or benefit sharing. If both parties agree that theirs is a relationship with a high degree of supplier alliance (upper right quadrant), then both the purchasing and the supplier firms have met their respective goals of establishing a different transactional basis.

However, the mismatches represent potentially intriguing or difficult situations. If the supplier perceives a high degree of alliance while the purchaser does not (lower right quadrant), then the purchasing firm is achieving desired results without necessarily providing what it perceives as much information, technical help, or benefits. Such situations represent opportunities whereby the benefits and gains of an alliance are being achieved by the purchasing company without the "pain" associated with alliance management. Purchasers would be particularly interested in whether such "illusory alliances" are sustainable and whether or not the benefits accrued are equivalent to those situations requiring more extensive involvement. A good examination of these issues would require longitudinal research involving paired responses over time, a research avenue currently under investigation by the authors.

On the other hand, if the purchaser perceives more of an alliance than the supplier does (upper left quadrant), the purchaser may have a poor idea about how the firm's efforts to establish supplier alliances were viewed by its "partners." There could be significant implications if the purchasing firm fails to recognize that its efforts to build alliances through greater information and benefit sharing leave its supplier unimpressed. Such situations could lead upset suppliers to switch their offerings as well as their accrued knowledge, including process improvements and new technical skills, to other buying firms.

OVERESTIMATION OF AN ALLIANCE BY THE PURCHASER

There are several reasons why a supplier might report a lower degree of alliance than its buyer counterpart. One reason is simply measurement error; both parties actually agree but give different scores. However, measurement problems are relatively easy to detect and to correct. More significantly, there may be systematic reasons for the difference. One such reason is that suppliers who disagree about the degree of alliance may share common characteristics. There may be prior conditions that make it more difficult to establish alliance relationships with some suppliers. Alternatively, some buyers may implement their relationship-building in ways that lead their suppliers to take a more negative view of the supposed alliance. In one case, the mismatch relates to the supplier selection procedure, while the latter case is attributable to mismanagement during the contract and the relationship itself (i.e., the ongoing alliance management process).

[ILLUSTRATION OMITTED]

Perceptual Mismatches and Negotiation Theory

Certain conditions may predispose some suppliers to judge a relationship as less of an alliance conditions such as relative size or power, perceived ability to gain something through the relationship, or willingness to deal openly with the purchaser. Deutsch classifies negotiation between parties into two categories of interdependence: contrient and promotive interdependence.[11] Contrient interdependence exists when there is a belief that the subject of negotiation is a "zero-sum game" and that advantages to one party accrue only at the expense of the other party. Prior negotiation research indicates that such situations would be characterized by large amounts of mistrust and suspicion, efforts to block goal attainment of the other party, and the use of coercive power to exercise influence. In contrast, promotive interdependence is characterized by situations in which each party believes that the other can influence outcomes and that a healthy degree of information sharing occurs.[12] The basic assumption about a supplier alliance is that the arrangement is based on promotive interdependence, or a "win-win" relationship, in which both parties are better off from the negotiated arrangement than they would otherwise have been. According to negotiation theorists, contrient interdependence is likely to arise when there is considerable mistrust or suspicion between parties, when there is a potential threat of coercive power, or when one party sees limited gains toward its own goal through cooperation.

Certain situations lead suppliers to view their relationship as contriently interdependent, or as a "win-lose" proposition - for example, when there are considerable power or size differences between buyer and supplier, or when the supplier perceives that the purchaser has little to offer in return. Also, some suppliers may view the world from a "win-lose" mindset, regardless of a purchaser's attempts to offer a different relationship. Therefore, companies that use their dominant position as buyers to force a supplier alliance will be viewed negatively by suppliers. Similarly, buying firms that say they have an alliance but do not have technical resources for supplier improvement efforts will be viewed negatively by the supply firms.

Three hypotheses were developed based on the premise that a supplier's contrary view of an alliance stemmed from such prior conditions:

Where:

a. The buyer perceived a high degree of alliance, and b. The supplier perceived a considerably lower degree of alliance

H1: The supplier had a philosophical outlook that was more disposed to a "zero-sum" view of any relationship.

H2: The supplier perceived the purchaser as having a greater degree of power or size than itself.

H3: The supplier saw less to be gained from a relationship with the purchasing firm.

compared with those cases where the supplier agreed with the buyer about the high degree of alliance.

Failures in the Alliance-Building Process

An alternative explanation for the purchaser's misperception of the supplier's view of their relationship is that the purchaser might have a poor idea about how its alliance-building process was perceived. Such problems may arise not from prior conditions but from the way the purchasing firm dealt with the supplier during the relationship. Potential shortcomings might include failure to share information or failure to provide technical assistance that the supplier expected. This alternative explanation draws from the services quality literature and, in particular, the gap model of service quality.[13] The gap model suggests that expectations are developed during the alliance negotiation and that the satisfaction with the alliance will depend on the extent to which the actual commitments meet or exceed those expectations that had previously been developed. For example, buying firms that entered into a strategic alliance but, during the course of the contract, purposely withheld valuable information and technical problem-solving assistance that the supplier required would meet with unfavorable assessments.

From this alternative theory, two hypotheses were developed:

Where:

a. The buyer perceived a high degree of alliance, and b. The supplier perceived a considerably lower degree of alliance

H4: The supplier viewed the purchasing firm as less willing to share information.

H5: The supplier viewed the purchasing firm as less forthcoming with the expected technical assistance.

compared with those cases where the supplier agreed with the buyer about the high degree of alliance.

RESEARCH METHODOLOGY

For this research, the degree of supplier alliance was determined using a modified version of a scale developed earlier by one of the authors; the factors measured were (1) the extent of joint problem-solving that occurred, and (2) the extent to which the achieved benefits were shared. Consistent with good survey design, multiple questions were developed for each construct, pretests were used to refine the questionnaire, some questions were reverse worded to avoid halo effects, and a 5-point balanced Likert-type scale was used.

The questionnaire was mailed to 980 purchasing executives in the Midwest, using a purchased sample frame from a well-known industrial catalog publisher. Respondents were vice presidents of purchasing or senior buyers in manufacturing firms. Approximately 230 useful responses were received, exhibiting a broad cross-section of industry participation, for a response rate of approximately 24 percent. In addition to industry classification data, the questionnaire included a request for a supplier contact for purposes of the follow-up (rebound) survey.

Of the 230 purchasing respondents, 142 suggested suppliers to contact. Of the 142 supplier surveys that were distributed, 88 suppliers responded (a rebound survey response rate of 62 percent). Firms responding to the rebound survey included both large suppliers and buyers (e.g., a steel manufacturer and a major integrated oil company) and small suppliers and buyers. The supplier industry classifications also represented a cross-section of types of firms.

Once the degree of alliance scores had been calculated for each respondent, a variable called "delta" was created that measured the difference between alliance scores given by the buyer and the matching supplier (buyer score - supplier score). The distribution statistics for delta showed a very small negative bias.(**) In other words, on average, the supplier rated the degree of alliance slightly higher than did the buyer. Cases in which the supplier's score was significantly less than the buyer's score were classified as mismatched perceptions.(***) As a result, only the most serious discrepancies in the alliance perceptions were selected, eliminating most cases that might merely be measurement errors. Moreover, the analysis was limited to those cases where the buyer perceived a reasonable degree of alliance (i.e., the buyer's degree of alliance score [greater than or equal to] 3.5 on a 5-point Likert-type scale).

As a result, two groups of buyer-supplier pairs emerged, both of which involved buyers who believed that their firms had established strong supplier alliances. The distinguishing feature of the groups was that one group was composed of suppliers who agreed that a sound alliance had been formed (the "Real Alliance" group, or the upper right quadrant of Table I) and the other was made up of suppliers that indicated a considerably lower alliance score (the "Illusory Alliance" group, or the upper left quadrant of Table I). This partitioning yielded 28 buyer-supplier pairs for the Illusory Alliance group and 46 buyer-supplier pairs in the Real Alliance group.

Measures for the various hypotheses to be tested were created using three-item scales. A sample of the questions posed within these scales, and their respective labels within the prior conditions (negotiation theory) framework, and the alliance building process (expectations gap theory) are presented as follows:

Prior Conditions Scales

Outlook: Whether the supplier believed that "what's good for the purchasing company is good for us"; that the supplier was "an extension of the purchasing company"; and whether "the purchasing company's problems are our problems."

Power: Whether the supplier considered the purchasing company considerably larger, capable of finding alternative sources, or had the ability to dictate terms about the supplier relationship.

Gains: Whether the supplier viewed the purchasing company as having the ability to help the supplier in a significant manner; the technical capability to help the supplier improve its products and processes; or dedicated resources for helping the supplier.

Alliance Building Process Scales

Infoshare: Whether the purchasing company shared valuable information; whether the purchasing company shared information that was potentially useful to its competitors.

Helpgap: This measure was the difference between the supplier's score in "Gains" and its score on a scale that measured what technical help the supplier thought it actually received.

T-tests were used to evaluate the significance of the difference between the mean scores on these variables for the Illusory Alliance and the Real Alliance groups. Significant differences in the means indicated that the corresponding factors were possible influences in the suppliers' perceptions about the alliances.

RESEARCH RESULTS

Effects of the Supplier's Prior Disposition

Table II shows the tests of the first three hypotheses, based on the assumption that the Illusory Alliance suppliers' attitudes were influenced by conditions outside the buyers' control.

The first hypothesis is supported: the suppliers who had less favorable perceptions of the degree of alliance differed significantly in their philosophical outlook toward sharing problems and information with their purchasing counterparts. In other words, the Illusory Alliance suppliers entered into the relationship with different and more pessimistic philosophical outlooks than did suppliers in the Real Alliance group. Thus, purchasers would likely face some level of initial resistance from such suppliers toward the nontransactional approach. The illusion of an alliance was at least partly due to these buyers dealing with suppliers who had some prior aversion to forming alliances.

EFFECTS OF SUPPLIER'S PRIOR CONDITIONS ON PERCEPTIONS OF DEGREE OF
ALLIANCE

             Average Score      Average Score      Significance of
           for Suppliers in    for Suppliers in       T-test of
             Real Alliance    Illusory Alliance     Difference of
                 Group             Group             Group Means
Variable        (n = 46)          (n = 28)        (one-tailed test)

Outlook          3.623              3.310              0.039
Power            3.536              3.405              0.471(*)
Gains            3.536              3.238              0.069

* This is a two-tailed test, since the direction was opposite to
that predicted.

The second hypothesis was denied. Suppliers who viewed their purchasing partners as larger and more powerful did not feel that there was less likelihood of a "win-win" relationship with them. Despite having responses from some very different sized companies, power was not used or perceived by either party as influencing the relationship. In fact, the direction of the difference was opposite to that hypothesized. The Illusory Alliance group consisted of suppliers who, on average, perceived their purchasers to be less powerful than did the Real Alliance group. There is some evidence, although not statistically significant, that large suppliers may be more difficult to entice into forming an alliance. Certainly, there was no support for the view that more powerful buyers cannot effect an alliance.

The third hypothesis was supported very modestly. The Illusory Alliance group did differ in the degree to which it saw potential benefits, such as technical assistance, from an alliance with the purchasing partners. The Illusory Alliance suppliers believed to a much lesser extent that the buyers could be a source of needed assistance.

Overall then, the tests based on these variables do provide some support for the theory that the Illusory Alliance suppliers were predisposed to view the supplier alliance negatively. The two groups were significantly different in their philosophical outlook toward shared problem solving and close dealings with customers. Illusory Alliance suppliers also saw these particular purchasing firms as having less to offer in the form of assistance. The test for the third hypothesis, based on power and influence, produced results which tend to suggest that some suppliers may constitute particularly difficult opportunities for alliance building efforts by purchasers, although this does not necessarily preclude them from an alliance process. Further, these reluctant suppliers were not distinguishable based on relative size.

Effects of the Alliance-Building Process

The last two hypotheses were based on the alternative theory that the Illusory Alliance group suppliers perceived a lower degree of alliance because of the way in which their purchasing partners managed the relationship. Table III shows the results of the tests of these hypotheses.

The first of these hypotheses is supported: the Illusory Alliance suppliers did judge their purchasing partners as being significantly less willing to share information or to pass on potentially sensitive material. Clearly, the suppliers in the Illusory Group are not very impressed with the purchasing firms' efforts at providing necessary information.

The second hypothesis is also supported. The meaning of the "Helpgap" variable should be reiterated: it is the difference between what the supplier saw as the potential technical and other assistance that the purchaser could provide (the previously used "Gains" variable) and the supplier's assessment of what assistance it actually received. A positive value indicates unfulfilled expectations. A negative value indicates that the assistance received was relatively larger compared with expectations. The larger the negative value, the greater the expectations were exceeded. For the Real Alliance group, expectations were greatly exceeded (high negative value for "Helpgap"), while the Illusory Alliance's expectations were exceeded only marginally.

Table III
EFFECTS OF PURCHASERS' ALLIANCE-BUILDING PROCESS ON SUPPLIERS'
PERCEPTION OF DEGREE OF ALLIANCE

              Average Score      Average Score      Significance of
            for Suppliers in    for Suppliers in       T-test of
              Real Alliance    Illusory Alliance     Difference of
                  Group             Group             Group Means
Variable         (n = 46)          (n = 28)        (one-tailed test)

Infoshare          3.696             3.196               0.003
Helpgap           -0.489            -0.143               0.009

Part of the negative view of the Illusory Alliance suppliers' perceptions of their relationship with their purchasing partners can therefore be linked to suppliers in this group being disappointed about unfulfilled promises of assistance from the purchasing firms (a gap between expectations and delivery), as well as the lower-than-expected flow of information from the purchaser. The purchasing firm's alliance-building methods can therefore be blamed in part for the different perceptions about whether a true supplier alliance was established.

CONCLUSIONS AND MANAGEMENT IMPLICATIONS

The study provides good preliminary findings about the sources of discontent among suppliers who deny the purchasing firms' belief that a strong supplier alliance was established. Specifically, some suppliers appear to be somewhat suspicious of purchasers' attempts to build supplier alliances. The suppliers in the Illusory Alliance group did espouse different philosophical outlooks and had different assumptions about potential benefits from such arrangements.

There was clear evidence that failure to meet suppliers expectations, either because the expectations were too high or because the delivery did not meet expected values, as well as withholding information necessary for problem solving, creates situations with conflicts. These suppliers, originally suspicious of alliances, may have had their suspicions exacerbated by the way the purchasing firms conducted their alliance-building efforts.

Not all supplier relationships need to be alliances. Numerous buyer-supplier pairs agreed that they shared low-alliance relationships. However, this investigation shows that a purchasing department that wishes to establish supplier alliances can assume that certain suppliers would be better targets than others for successful alliances. While the suppliers who rated the alliance lower than the buyers could not be distinguished from the others on the basis of power and size, there were strong indications that the gains from an alliance, from the suppliers' perspective, are not always made clear and that a long history of transactional relationships is not easily dismissed. Additionally, firms should be concerned about how well they can deliver benefits compared with suppliers' expectations about outcomes from alliance relationships. Supplier alliances require information sharing and problem solving. If the supplier believes that the purchasing firm lacks the capability to help solve its problems and if the purchasing company is not forthcoming with required assistance, the alliance will not be viewed favorably by the supplier. Additionally, the benefits from alliances for the supplier will require better communication, since there appears to be some prior supplier suspicion.

In summary, purchasing managers can enhance their chances of success in alliance building by seeking firms that are philosophically well matched for nontransaction-type relationships; by communicating the advantages from such alliances to the supplier; and by ensuring that information and technical assistance is available. Both the selection procedure and the alliance process are critical in ensuring success.

To enhance the prospects for success in establishing supplier alliances, purchasing should design and implement an operating plan similar to the one noted below.

1. Identify supplier firms in which a philosophical match exists between the two firms' managements on such issues as views toward quality and productivity improvement. Such a fit is possible despite differences in the parties' sizes and power.

2. Create an interorganizational task force to establish clear expectations of the information required for successful problem identification and resolution, the level of technical expertise available from both parties, and how the benefits from such improvements are to be measured and then shared in a mutually agreeable manner.

3. Slightly exceed the expectations established in item 2 above.

The study also indicates the need for additional research. The negotiation theory concepts were only partially supported, and the lack of influence of power relationships was surprising, to say the least. Despite the presence of some very large firms in the study, power perceptions were not significant. However, the service gap model was strongly supported by the research, and indicates that the gap between expectations and delivery, as well as issues related to information exchange theory may hold some research potential. In addition, there may be some interactive effects between the two models whereby power differences can be overcome by good process delivery. Testing a revised model that recognizes such interaction would be worthwhile.

* For the purposes of this paper, "strategic supplier alliance" is used synonymously with the more commonly used "supplier partnership," to avoid confusion with the legal term "partnership."

** Mean = -0.05; standard deviation = 0.67.

*** Cases in which delta [greater than or equal to] +0.25 (i.e., approximately 1/2 standard deviation above the mean delta value).

REFERENCES

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5. G. Walker and D. Weber, "Supplier Competition, Uncertainty, and Make-or-Buy Decisions," Academy of Management Journal, vol. 30, no. 3 (1987), pp. 589-96; O.E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York: Free Press, 1975).

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7. C.K. Hahn, K.H. Kim, and J.S. Kim, "Costs of Competition: Implications for Purchasing Strategy," Journal of Purchasing and Materials Management, vol. 22, no. 3 (1986), pp. 2-7; H.J. Harrington, The Improvement Process (New York: McGraw Hill, 1987), pp. 155-74; R.G. Newman, "Insuring Quality: Purchasing's Role," Journal of Purchasing and Materials Management, Fall 1988, pp. 14-21; Spekman, op. cit.; M. Treleven, "Single Sourcing: A Management Tool for the Quality Supplier," Journal of Purchasing and Materials Management, Spring 1987, pp. 19-24; J.W. Patterson, and S. Engelkemeyer, "A Company Cannot Live by Its Quality Alone," Quality Progress, August 1989, pp. 25-27.

8. S. George, The Baldridge Quality System (New York: John Wiley 1992), p. 117; Landeros, op. cit.; J.P. Womack, D.T. Jones, and D. Roos, The Machine That Changed the World (New York, Harper Perennial, 1991), pp. 146-56.

9. L.M. Ellram, "A Managerial Guideline for the Development and Implementation of Purchasing Partnerships," International Journal of Purchasing and Materials Management, vol. 27, no. 2 (1991), pp. 2-8; R.A. Klein, "Achieve Total Quality Management," Chemical Engineering Progress, November 1991, pp. 83-86; Landeros, op. cit.; J. Oberle, "Quality Gurus: The Men and Their Message," Training, January 1990, pp. 47-52; Treleven, op. cit.

10. F.I. Stuart, "Supplier Partnerships: Influencing Factors and Strategic Benefits," International Journal of Purchasing and Materials Management, vol. 29, no. 4, (1993), pp. 22-28.

11. M. Deutsch, "Cooperation and Trust: Some Theoretical Notes," in M.R. Jones, ed., Nebraska Symposium on Motivation (Lincoln, Nebraska: University of Nebraska Press, 1962), pp. 275-318; M. Deutsch, The Resolution of Conflict (New Haven: Yale University Press, 1973).

12. E. Goffman, Strategic Interaction (Philadelphia: University of Pennsylvania Press, 1969); B.H. Raven and J.Z. Rubin, Social Psychology: People in Groups (New York: John Wiley, 1973).

13. A. Parasuraman, V.A. Zeithmal, and L.L. Berry, "A Conceptual Model of Service Quality and Its Implications for Future Research," Journal of Marketing, Fall 1985, p. 44.

F. Ian Stuart is an Assistant Professor of Operations Management at the University of Victoria, Canada. He received his Ph.D. degree from the University of Western Ontario. Dr. Stuart is a previous contributor to the Journal and is an active researcher in supplier management and quality issues.

David McCutcheon is an Assistant Professor of Operations Management at the University of Victoria. He previously taught at the University of Cincinnati. He received his Ph.D. degree from the University of Western Ontario. Dr. McCutcheon's research interests include technology management, particularly the implementation issues and the impact of change.

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