Effectively managing complex supply chain relationships could add value

UNIVERSITY PARK, PA – Many modern industries rely on a network of suppliers to independently develop and supply parts which are then combined into a finished product by the purchaser, a process often referred to as modularization. For example, manufacturers of computer parts may sell parts to a company that assembles them into a finished computer.

As supply chains become more complicated and technology becomes more complex, managing these supplier relationships becomes more difficult and, if poorly managed, could pose risks to how knowledge is shared – or not – with the buyer.

However, in one study, a team of researchers led by the Penn State Smeal College of Business found that companies that effectively manage these relationships could not only minimize risk, but even uncover strategic opportunities in those relationships.

In order to turn supply chain risks into opportunities, the researchers suggest that buyers need to be aware of the pros and cons of different governance mechanisms to manage their relationships with suppliers, said Stefan Wuyts, professor of marketing, Smeal College of Business and director of the Institute for the Study of Business Markets. Governance encompasses formal processes such as monitoring and contracts, as well as less formal socialization approaches, such as meetings and discussions with suppliers.

“We have found that the effectiveness of these formal and informal mechanisms depends on the modularity of the system,” Wuyts said. “The modularity of the system actually replaces surveillance. Surveillance is a formal control, but so is the threat if a supplier does not respect the agreements, the buyer will replace the supplier. We find that good relationship performance is achieved if you take on any of these, but there is no point in investing in intensive monitoring when your system is already very modular. They basically substitute for each other.

On the other hand, modularity complements socialization, according to the researchers, who report their findings in the Journal of the Academy of Marketing Science.

“Socialization is a collaborative approach to control, one where parties have regular conversations to identify common goals and develop collaborative relationships that can build trust and develop relationship norms over time. And it can also serve as a way to keep both parties online, ”said Wuyts, who worked with Nukhet Harmancioglu, assistant professor of marketing, Koç University, Turkey; and Peren Özturan, Assistant Professor of Marketing, Zyeğin University.

The researchers found that managers do not take modularity into account when selecting governance mechanisms. Moreover, previous research has not sufficiently examined the implications of modularity on governance for innovation supply relationships.

Threats and Opportunities

Modularization obviously has its advantages, especially in terms of cost and efficiency, but Wuyts added that supply relationships present some risks for companies.

“It goes with the idea that companies operate independently of each other, they pursue their own best interests and in some cases this conflicts,” Wuyts said. “The question then becomes how do you manage these relationships to avoid opportunistic behavior, which refers to the supplier operating the buying company?” “

Broadly speaking, three strategic issues can arise in the way knowledge is managed among buyers and suppliers, Wuyts said.

First, he said that problems can arise in the specificity of knowledge, which means that buyers might become too dependent on suppliers for knowledge and know-how.

“For the buyer, it’s ‘I’m investing in you – and all of my investments are specific to you,’” Wuyts said. “But, that might give the supplier the opportunity to say, ‘OK, now that you’ve made all these investments, let’s change the terms of trade.’ “

Another concern for buying companies is knowledge asymmetry, which means that knowledge can be unevenly distributed among partners, leaving the buyer vulnerable.

“In a case of knowledge asymmetry, let’s say I’m a buyer and my suppliers claim to follow the latest technological advancements, but actually choose to use techniques because they make the most sense for their business, not for mine. If I don’t have the technological knowledge, I can’t call these vendors, ”Wuyts said.

Finally, buyers worry about knowledge overflow, which is when a buyer’s knowledge may spill over into the supplier and they might share innovations with other parties, including competitors.

“It’s in these situations that companies have to think very carefully about what they’re going to do about these relationships,” Wuyts said.

Establishing contracts between the parties, while necessary, probably cannot be a complete solution to these problems, the researchers said.

“Sometimes writing contracts helps manage these relationships,” Wuyts said. “But, in innovative industries, where the future is so unpredictable, what are you going to put in this contract? You can hardly put all the contingencies in a contract. So you need to think about other ways to protect yourself against risks.

Socialization offers another approach to managing buyer relationships, the researchers say.

While the specificity of knowledge, asymmetry, and spillover effects are generally viewed as negative for the buyer, Wuyts said the research team found that they can also benefit the buyer as long as the right mechanisms are in place. governance are used to control suppliers.

Making specific investments in the supplier can benefit the buyer when the supplier returns the favor; knowledge asymmetry can benefit the buyer as he gains access to new knowledge; and while knowledge leakage can be a risk, suppliers can be a source of other knowledge that they acquire through other relationships in the market.

Wuyts said that as the business environment becomes more complex, better management of supplier relationships becomes more and more important.

“As these relationships become more and more complex, it is important to recognize potential dangers and then make the appropriate governance decisions to turn them into strategic opportunities. As systems become more modular, proper governance means less emphasis on monitoring and more emphasis on socialization, ”said Wuyts.

The researchers interviewed approximately 663 executives from North American purchasing companies. They only selected companies active in technology-intensive sectors, such as biotechnology, computer hardware, pharmaceuticals and automobiles. These industries often depend on external procurement and modular systems. Researchers only contacted company officials if they were classified as managers or above.

After the first interviews, around 663 companies met these criteria and received a questionnaire. A total of 194 usable questionnaires provided data for the study.

Among other future research ideas, the researchers said they could extend the scope beyond relationship performance and examine system-level outcome variables.