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The Effects of Inter-firm Power on Supply Chain Relationships

Author(s):

Dr. Michael Maloni
Dr. Michael Maloni, Consultant, Andersen Consulting, Strategic Logistics Practice, Cleveland, OH, 216-623-0503, Michael.J.Maloni@ac.com.
Dr. W.C. Benton
Dr. W.C. Benton, Professor, Fisher College of Business, The Ohio State University, Columbus, OH 43210, 614-292-8868, Benton.1@osu.edu.

83rd Annual International Conference Proceedings - 1998 

Abstract. Supply chain management has been promoted as a means to position manufacturing as a source of competitive advantage in the market place. Inter-firm power influences, however, retain the potential to upset effective supply chain integration. Through structural analysis of survey data from the automotive industry, this research serves to offer one of the first works to analyze power in the supply chain. The results offer significant insights for both supply chain strategy and research.

Introduction. With an increasingly competitive and demanding global market place, firms over the last few decades have realized the potential of positioning manufacturing as a source of competitive advantage. Best practices operational processes can yield significant supply chain value through increased responsiveness, higher quality, improved product development, reduced costs, and faster cycle times. Such strategy requires re-engineering of traditional operational functions and extends beyond the manufacturer to the rest of the supply chain. Because the supply chain is only as strong as its weakest link, supply chain participants must coordinate supply chain strategies to allow for an effective value package to be delivered to the customer.

Supply Chain Management. Much researcher and practitioner optimism has been directed toward integration of the supply chain. Supply chain management seeks to break down the traditionally competitive barriers between buyers, suppliers, and distributors to create a streamlined, efficient chain that is ultimately able to yield enhanced customer satisfaction. Ultimately, supply chain management offers significant benefits derived from joint planning, process coordination, decreased, uncertainty, enhanced responsiveness, decreased costs, and shared risk. Such benefits are conceptually shared throughout the chain so that all participants can benefit from the integration.

With the relational orientation of its objectives, supply chain management requires a significant transformation of corporate attitudes and processes from an orientation of autonomy to one of alliance. Significant barriers exist, however, to limit the implementation of effective supply-chain management in practice, and research should be able to fulfill a critical role in facilitating supply chain management execution. The research described here contributes such work in an analysis of one supply chain management deterrent: inter-firm power.

Defined, power involves the ability of one firm (the source) to influence the actions and intentions of another (the target). Power asymmetry (imbalance) as a natural in most inter-firm relationships yields the potential to upset the relationalism and mutuality of supply chain integration efforts in that the nature of relational exchange in the integrated supply chain exposes participants to opportunistic behavior by partners. Furthermore, firms holding an influence advantage may be able to enjoy profitability without the support of coordinated supply chain efforts. The research described here offers one of the first empirical investigations of power influences within the supply chain. Based on a survey of suppliers in the automotive industry, the research sought to examine the effects of power asymmetry upon the relationships between buyers and suppliers. The research also served to analyze the ultimate effects of the power-driven relationship upon performance and satisfaction within the supply chain. With such goals, the research sought to create an awareness of supply chain power effects as well as facilitate an understanding of how to effectively managed power may be used to benefit both the power holder and the power targets. Such research objectives are oriented toward the enhancement of effective supply chain implementation.

Background. There has been a recent push of supply chain literature [Maloni and Benton, 1997] that both praises the value of supply chain management and offers insights and direction for supply chain management implementation. Supply chain management requires enhanced inter-firm relationships that foster an environment of cooperation, trust, and commitment, allowing for coordinated strategy and planning, enhanced information flows, and joint product and process improvement. Power asymmetry presents a significance barrier to such integration, yet the effects of inter-firm power influences upon the supply chain have yet to be thoroughly addressed in research efforts.

Although little power research exists in supply chain literature, examples of such work may be found with social sciences and retail-oriented, marketing literature. To most, power retains a negative connotation, but many forms, both positive and negative, exist. French and Raven [1955] identify six bases of power as identified in Table 1. The marketing literature has shown that competitive, mediated power sources such as coercive, reward, and legal legitimate tend to prove detrimental to critical inter-firm relationship elements such as cooperation, commitment, and trust. Non-mediated, relational oriented power sources, however, have been shown to enhance such elements as well as improve performance and satisfaction.

  • Reward - The source has the ability to mediate towards the target.
  • Punishment - The source has the ability to mediate punishment to the target. Also termed as Coercive.
  • Legitimate - The source has the legitimate right to influence behavior over the target. This is based primarily on acceptance of roles (Traditional Legitimate) as well as judiciary restraints (Legal Legitimate).
  • Identification - The target will allow influence by the source to maintain identification with the source. Also termed as Referent.
  • Expertise - The source holds distinctive knowledge, information, and skills that are valuable to the target. Also termed as Information.

Based on a synthesis of the marketing power and supply chain literature bases, a research model was developed and is generalized in Figure 1. This model first seeks to analyze the effects of distinct power strategies upon the nature of the buyer-supplier relationship as defined by its critical elements such as cooperation, commitment, trust and conflict. The model that examines the effects of this power-influenced relationship upon supply chain performance and satisfaction. Due to integrated dependence relationships within the model, structural equation modeling was targeted as the best to for model verification. Subsequently, analysis of path significance would allow for testing of research hypotheses.
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Methodology. To test the conceptualized model, the research focused upon the automobile industry due to its strengths given the research objectives. With five manufacturers accounting for over 85% of U.S. new car sales, the industry has a definable power structure, and buyer-supplier relationships have proven critical product and process improvement efforts that are extremely critical to industry success. To verify the practical application of the research objectives, meetings were held with industry practitioners who offered crucial guidance as well as provided sources for research data. Based on an extensive literature review and pilot testing with experts, a survey instrument was then developed and mailed to 511 suppliers in the industry. Data collection efforts yielded 180 returns for a response rate of 35.2%

As recommended by Anderson and Gerbing [1988], a two step approach was utilized to assess the fit between the model and the data. The measurement model was evaluated first, leaving the ability of the indicators to measure the latent factors of interest and allowing for assessment of construct validity. Once an acceptable measurement model was found, the structural model was then tested. Fit indicates verified a satisfactory model, allowing for testing of the significance of the causal paths in evaluation of the research hypotheses.

Research Findings. The research produced several significant findings with regard to power influences within the supply chain and offer insight into the use of power management as a valuable supply chain tool. First, the research reveled evidence for the effects of specific power bases upon the nature of supply chain relationships. Non-mediated power bases including expert and referent power were found to retain significant positive effects upon the relationship. Likewise, reward power also yielded a significant positive effect but this influence was not as strong as that of the non-mediated sources. The research also yielded evidence for the harmful nature of completely mediated power strategies as coercive and legal legitimate bases retained significant negative relationships open the orientation of the relationships.

The research also offered indication that supply chain performance and satisfaction could be enhanced through effective use of power. Specifically, the power-affected relationship factor was found to have a significant impact upon performance as examined from the viewpoint of the supplier, manufacturer and the entire supply chain. The relationship was also retained a significant influence upon the general satisfaction within the chain.

The research findings highlight the need for the effective management of power within the supply chain. An unaware power holder may see no advantage in relinquishing their power advantage, but the research has reveled that prudent use of power can benefit the power source and the power target alike. Thus, the members of supply chain must increase their consciousness of the power sources present within the chain and understand how these sources will affect the orientation and success of supply chain management efforts. Power holders can serve to improve the competitive position of the entire supply chain through effective promotion of non-mediated power bases. As coercive power strategies will prove detrimental to supply chain integration efforts, power holders must also practice sensible control of coercive strategies.

Conclusions. The research described here has served to reveal the effects of power influences within the supply chain. It has shown that power will significantly affect the nature of the supply chain relationships and in turn influence supply chain performance. Thus, practitioners who do not consider power effects in the chain cannot formulate and subsequently implement effective supply chain strategy. These practitioners must be aware of the power influences. Likewise, researchers who disregard power effects when conducting empirical and conceptual studies may yield un implementable or even injurious results.

The research has shown evidence that power may be actually used as a benificial tool for improving the relational orientation of the supply chain, benefiting the power holder and targets. These significant research findings justify the need for further supply chain power research to provide additional insight into power management strategies and effects. Such research will enhance the development and implementation of supply chain management in industry and promote the positioning of manufacturing as an effective source of competitive advantage in the market place.

References

Anderson,J.C. & Gerbing, D.W. "Structural equation modeling in practice : a review and recommended two-step approach", Psychological Bulletin, 1988,103, 411-423

French,J.R. & Raven,B. "The bases of social power", in Studies in Social Power.

Cartwright, D., ed., Ann Arbor: University of Michigan Press,1959.

Maloni, M.J. & Benton, W.C. "Supply chain partnerships; opportunities for operations research", forthcoming in European Journal of Operation Research.


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