Effective Supplier Relationships Without Formal Alliances

Author(s):

Dr. Robert Landeros
Dr. Robert Landeros, Associate Professor Western Michigan University, Kalamazoo, MI 49008, 616/387-5988.
Dr. Robert F. Reck
Dr. Robert F. Reck, Associate Professor Western Michigan University, Kalamazoo, MI 49008, 616/387-5988.
Dr. Judith Whipple
Dr. Judith Whipple, Assistant Professor Western Michigan University, Kalamazoo, MI 49008, 616/387-5988.

82nd Annual International Conference Proceedings - 1997 

Overview. The presentation will discuss purposed research that examines a spectrum of buyer-seller relationships that fall between "arm-length" and "formal alliances." The current phase of this research is: (1) categorizing various buyer-seller relationships available, and (2) identifying the benefits of the potential relationships that exist in addition to arm-length and formal alliances.

Background. The intensity of global competition has forced many firms to re-evaluate their competitive positions. The changing environment has encouraged firms to concentrate on continuously improving customer satisfaction while increasing productivity and performance. The strategic response to these changing conditions was the proliferation of various programs such as just-in-time (JIT), total quality management (TQM), continuous process improvement (CPI), and concurrent engineering.

Numerous research efforts have examined alliances. Ellram (1995) and Schmitz, Frankel, and Frayer (1995) developed models that managers could use to guide the development and implementation of alliances. Landeros, Reck and Plank (1995) provided a model for maintaining alliances. This model showed a broad spectrum of buyer- seller relationships with the traditional adversarial (or "arms- length") relationships at one end of the spectrum and formal strategic alliances at the other end. In between these endpoints are a variety of buyer-seller relationships that exist at various levels of commitment, trust, dependence and potential benefit. In this manner, firms may choose alternatives such that they can replace adversarial relationships with more beneficial and cooperative relationships without the formal commitment to a strategic alliance. A fundamental assumption of these programs is that firms must have positive working relationships with suppliers and, as such, the focus of these programs has been on the development of partnerships or alliances with suppliers. However, the reported success rates for many alliances are relatively low, and firms state that, due to the amount of time and resources needed to commit to an alliance, there is a limit to the number of successful alliances they can maintain.

A basic assumption of the research for this presentation is that buying firms must segment their supply base and their relationships with their suppliers. The following section discusses segmentation from a marketing perspective and the theoretical foundation for the benefits of a segmentation strategy.

Segmenting Buyer-Seller Relationships. Segmentation is necessary and often critical to the development of effective marketing strategies in competitive industries. Segmenting a market permits firms to gain an understanding of customers' varied needs and purchase patterns, and thus firms can respond differently to marketing mixes. Furthermore, market segmentation provides data on market conditions and actions by competitors. Obtaining such data helps firms to identify those segments that offer the most promising opportunities in relation to the firmsþ strengths. In other words, firms can develop strategies and implement programs aimed at the unique needs of targeted segments, and allocate marketing resources, effectively and efficiency.

Market segmentation provides numerous benefits. However, the primary aim of segmentation is consumer marketing, not "business-to- business" marketing. As such, only limited research into the concept of industrial market segmentation is available (Segal, 1989). A problem of researching industrial market segmentation is isolating the best variables for identifying and defining industrial market segments (Sharpio and Bonoma, 1984; Plank, 1985). Sharpio and Bonoma (1984) suggested purchasing approaches (including buyer-seller relationships) that could serve as possible dimensions for segmenting an industrial market. Segal (1989) examined the viability of an industrial buyer's preference for a single supply source versus multiple sources of supply as an effective basis of industrial market segmentation. The results indicate that purchasing managers preferring a single source use different purchasing criteria than those relying on multiple suppliers. The findings suggest that segmentation of buyer-supplier relationships is possible.

Other factors, beyond a preference for single or multiple sources, impact a buyer's sourcing decision and thus could be segmentation criteria. For example, Heide and Stump (1995) used transaction-time as a key dimension for contrasting types of buyer- seller relationships. Other variables that may impact sourcing decisions are the critical nature of the purchased part, substitute part availability, piece price versus total cost, the supplier's technical sophistication and quality orientation, and the potential for cost or value improvement.

We hypothesize that a segmentation model can be developed and tested to guide managers on which type of buyer-seller relationship is ideal given the conditions of the purchase. For example, in order to develop, implement and maintain a formal strategic alliance the buyer and seller may need to devote significant time and resources to advance the relationship. High levels of trust and commitment need to be achieved and the relationship may need to be long-term in order to justify investments in time and resources. Given this, it may not make sense to invest in a strategic alliance for a purchase part that will only be used for a single model year, that is deemed non-critical to the finished product, or that offers little opportunity for improvement. On the other hand, suppose ten-percent of the purchasing budget is devoted to buying one part from a single supplier and there is significant opportunity for improvement in function and cost of this part. In this case, a formal strategic alliance may provide both the buyer and supplier with substantial "bottom-line" improvements.

The Study. The general purpose of this research is two-fold. First, the research will augment and expand our understanding of buyer-seller relationships. Second, the research will provide a model for industrial market segmentation, which includes buyer-seller relationships between the polar-extremes of arm-length and formal strategic alliance relationships. The focus is on the benefits that a buying firm may achieve from these varying levels of buyer-seller relationships. This research effort will bridge the informational void in the buyer-seller relationship research by addressing preferences for the use of, and benefits derived from relationships that fall between arms-length and alliances. A good understanding of these buyer-seller relationships and their benefits should be of critical importance to purchasing managers. It is likely that greater insight into the characteristics and the benefits to firms using such relationships should enable purchasing managers to devise effective segmentation and competitive purchasing strategies.

Managerial Implications. Significant research has focused on the development, implementation and maintenance of formal strategic alliances. However formal strategic alliances are only a small percentage of the relationships that a firm has with its supply base. Therefore, there are considerable opportunities to for a firm to improve its buyer-seller relationships. This session will address these issues and provide the tools to help managers improve their existing and future supplier relationships without the necessity of developing formal strategic alliances.

The objectives of the presentation are:

  • To discuss the need to transform hostile supplier relationships to sound collaborative relationships that lie between the polar-extremes of adversarial and alliance relationships;
  • To describe the characteristics of alternative collaborative supplier relationships; and
  • To examine the development and implementation of effective collaborative relationships.

REFERENCES

Ellram, Lisa M. (1995), "A Managerial Guideline for the Development and Implementation of Purchasing Partnerships," International Journal of Purchasing and Materials Management, vol. 31, no. 2, pp. 10-16.

Heide, Jan B. and Rodney L. Stump (1995), "Performance Implications of Buyer-Seller Relationships in Industrial Markets A Transaction Cost Explanation," Journal of Business Research, vol. 32, pp. 57- 66.

Landeros, Robert, Robert F. Reck and Richard E. Plank (1995), "Maintaining Buyer-Supplier Partnerships, International Journal of Purchasing and Materials Management, vol. 31, no. 3, pp. 3-11.

Plank, Richard E. (1985), A Critical Review of Industrial Market Segmentation, Industrial Marketing Management, vol. 14, pp. 79-91.

Segal, Madhav N. (1989), "Implications of Single vs. Multiple Buying Sources." Industrial Marketing Management, vol. 18, pp. 163-178.

Schmitz, Judith, Robert Frankel, and David J. Frayer (1995), "ECR Alliances: A Best Practices Model," A research monograph for the Best Practices Operating Committee: Joint Industry Project on Efficient Consumer Response.

Sharpio, Benson P. and Thomas V. Bonoma (1984), How to Segment Industrial Markets, Harvard Business Review, vol. 62, pp. 104-110.


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