The Longitudinal Impact of Supplier Development Efforts on the Buying Firm's Financial Performance

By Chung, Moonwon; Malhotra, Manoj K. et al. | Journal of Managerial Issues, Winter 2018 | Go to article overview

The Longitudinal Impact of Supplier Development Efforts on the Buying Firm's Financial Performance


Chung, Moonwon, Malhotra, Manoj K., Park, Sangwook, Journal of Managerial Issues


The global economic crisis in 2007 was a time when management capabilities of firms were put to the test. Hoberg and Alicke (2013) found that the change in annual orders in selected US manufacturing sectors showed a minimum of 18.6% decrease in consumer and electronic products, and up to a 42.3% decrease in transportation equipment during the economic recession. Although the crisis originated from the United States, the globalization and interconnectedness of financial infrastructure enabled financial shock contagion due to volatility spillovers (Iyer and Peydro, 2011). Eventually, the real economy was also affected by this monetary shock, showing a decrease in consumption, production, and employment, all of which contributed to the global recession. Economies in multiple nations showed an overall decrease in monetary liquidity, export, and production (Korea Small Business Institute, 2008). As oil and raw material prices escalated since 2007, many small and mid-size manufacturers reported bankruptcy. These upstream bankruptcies of firms in a supply chain can cause disruptions, which may impact the performance of all the related firms within the supply chain. At the same time, heterogeneity in firm survival was witnessed across different countries, a phenomenon which cannot be explained by globalization or financial integration alone (Bekaert et al., 2014). This heterogeneity offers a precious opportunity to identify the role of supply chain management in managing the firm's position during a global event that lasted multiple years. As an example of this stream of research, Schotter and Diep (2013) have compared firms' supply chain robustness and resilience arising from key suppliers in many supply chains under external shocks. In deviating away from economic shocks and events alone, Olcott and Oliver (2014) investigated the 2011 earthquake disaster in Japan and showed how the social capital accumulated within supply chains helped the rapid restoration of production.

It is also important to note that supply chains of manufacturing firms were in a vulnerable state at the time of the 2007 recession because of the widespread practice of supply base optimization. During the past decade, large manufacturing firms with complex supply chains engaged in supply base reduction, which resulted in an increased dependency on fewer suppliers (Krause etai, 1998) that made firms more susceptible to disruption risks. Moreover, the average manufacturing firm now spends over 50 percent of its revenues on purchased inputs, and due to greater outsourcing, procurement costs exceed billions in large corporations (Handheld and Krause, 2000; Balakrishnan and Natarajan, 2013). Managing the cost and disruption risk of losing suppliers due to bankruptcy is becoming more important, and this volatile environment is enforcing an entirely new challenge for the sourcing departments. Hoberg and Alicke (2013) further identified key activities necessary for a firm to manage these challenges, including identification of critical suppliers, monitoring supplier health and lead times, ensuring the survival of critical suppliers, and defining smart contracts. This study tries to understand how supplier development efforts can contribute to risk mitigation and building of more resilient supply chains.

Supplier Development Effort (SDE), an initiative which started back in the 1990s (Hahn et al., 1990), can provide insight into the importance of activities identified above. Most of the current literature adopts the following definition of SDE: "Any effort of a buying firm with its supplier(s) to increase the performance and/or capabilities of the supplier and meet the buying firm's short- and/or long-term supply needs." (Krause and Ellram, 1997: 21). A well-known example of its application is the Japanese Keiretsu, where the dominant firm creates a competitive environment among its suppliers and provides direct assistance simultaneously (Krause et al. …

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