The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers
and Competitive Advantage
By
Stephan M. Wagner, Ph.D.
WHU-Otto Beisheim Graduate School of Management
ISBM Report 12-2005
Institute for the Study of Business Markets
The Pennsylvania State University
402 Business Administration Building
University Park, PA 16802-3004
(814) 863-2782 or (814) 863-0413 Fax
The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers
and Competitive Advantage
STEPHAN M. WAGNER
WHU – Otto Beisheim Graduate School of Management
Chair of Logistics Management
Burgplatz 2
56179 Vallendar, Germany
Phone: +49 261 6509-430
Fax: +49 261 6509-439
Email: stephan.wagner@whu.edu
ISBM Working Paper Series
January 22, 2005
1
The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers
and Competitive Advantage
Abstract
Supplier development involves the customer firm’s support of a deficient supplier in a channel.
This research examines the relationship between supplier development, supplier firm
improvement and the support of the customer firm’s competitive advantage. Results largely
conform to expectations. When the appropriate supplier development activities are undertaken,
the customer firm substantially backs up a differentiation as well as a cost leadership strategy.
Supplier development activities focusing on supplier capability improvement have the strongest
impact on both generic competitive strategies. Furthermore, firms should stay away from
combining direct and indirect supplier development measures. Overall, this study underlines that
supplier development is powerful. Supplier development in channel research is a widely
neglected interfirm relationship management practice.
2
The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers
and Competitive Advantage
1.
Introduction
Firms in most industries have more and more focused on their core competencies and outsourced
products and activities that were previously considered integral to the firm. Several studies have
reported that industrial firms spend up to 60 or even 70% of their budget to suppliers for
purchased materials (Chapman, Dempsey, Ramsdell, and Reopel 1997; Heberling, Carter, and
Hoagland 1992). The trend towards outsourcing is tied in with the necessity to access and exploit
specialized competencies residing in the supplier network (Dyer and Nobeoka 2000; Mowery,
Oxley, and Silverman 1996). Suppliers may possess superior technological, manufacturing or
logistics competencies. One approach firms pursue to access these technological competencies is
to extend new product development activities and integrate internal company resources with
those of their key suppliers (Fritsch and Lukas 2001; Von Hippel 1988). Another approach to
utilize suppliers’ competence in the agile manufacturing and delivery of products is to set up justin-time exchange relationships. In just-in-time relationships, the frequent exchange of joint
product-, production- and logistics-related information allows for the flexible and reliable
shipment of exact quantities and ensures that the buying firm’s production processes run
uninterrupted (Frazier, Spekman, and O’Neal 1988; Waters-Fuller 1995). High flexibility in the
supplier network can help firms to cope with uncertain and dynamic market environments and
customer needs. As a result, in order to identify and realize significant cost savings or added
customer value, firms have to work through suppliers and can no longer limit such efforts to their
firm boundaries. Put differently, firms increasingly have to rely on their suppliers’ contributions
to accomplish strategic ends and create competitive advantage.
3
Business marketing and marketing channel research has extensively explored how competent
suppliers and the management of relationships with such suppliers can boost the buying firm’s
performance and can contribute to the accomplishment of strategic goals and the creation of
competitive advantage. Most research in this area addresses factors and antecedents of buyersupplier relationships, such as cooperative norms (Anderson and Narus 1990; Heide and John
1992), trust and commitment (Anderson and Weitz 1992; Doney and Cannon 1997), information
exchange and communication (Mohr and Nevin 1990; Mohr and Sohi 1995) or dependence and
safeguarding of relationship-specific investments (Buvik and Reve 2001; Heide and John 1988).
Furthermore, the outcomes of buyer-supplier relationship characteristics and collaborative
processes (i.e., collaborative product development) on key performance outcomes of the firm
(Jap 1999; Johnson 1999; Noordewier, John, and Nevin 1990) and the supplier (Kalwani and
Narayandas 1995; LaBahn and Krapfel 1999) have been investigated.
In sum, the impact of suppliers and supplier relationship management on strategic goals,
competitive advantage, and performance has received substantial research attention. However,
very little is known about the impact of firms’ supplier development efforts. In other words,
while the facilitating conditions for performance improvements and contributions to competitive
advantage through the collaboration with capable suppliers has been studied, no one has asked
the ensuing question: How does the development of deficient suppliers support firms in the
creation of competitive advantage? Motivated by this question, the objective of this study is to
contribute to the business marketing and supply chain management literature by providing new
insights about the effect of supplier development practices on (1) the supplier’s product and
delivery performance, (2) the supplier’s capabilities, and (3) the customer firm’s competitive
advantage.
4
To achieve this objective, the second section draws on current supplier development, supplier
relationship management and marketing strategy literatures as foundations for the proposed
conceptual model. In particular, hypotheses regarding the effect of supplier development
practices on the suppliers’ product and delivery performance and capabilities and their effect on
the customer firms’ competitive advantage are developed. Section 3 describes the empirical study
in which these effects were tested. The results of the data analysis are presented in Section 4. The
article concludes with a discussion of the results and managerial implications.
2.
Conceptual background and hypotheses
2.1. Supplier development
In situations when firms are forced to upgrade the delivery performance or quality of goods or
services (for brevity, hereafter the term “product” is used to refer to both goods as well as
services) provided by a supplier in order to regain or sustain competitiveness on the market, they
can principally follow one of three avenues. The first option is to switch the supplier, i.e. to
search for alternative sources of supply and source the product from a more capable supplier
(Demski, Sappington, and Spiller 1987; Sambandam and Lord 1995). This option, however,
might not be viable if alternative suppliers are not available or if switching costs are excessively
high. Second, through vertical integration the firm can bring the needed product in-house by
acquiring the supplier or setting up capacities to turn out the product internally (Langlois and
Robertson 1989; Monteverde and Teece 1982). Vertical integration might require substantial
investments and be in contradiction to the firms’ intention to focus on their core competencies
and outsource non-core activities. The third option is to assist the deficient supplier so that the
supplier’s performance or the supplier’s capabilities are upgraded to the desired level.
5
Supplier development has been defined as “a long-term cooperative effort between a buying firm
and its suppliers to upgrade the suppliers’ technical, quality, delivery, and cost capabilities and to
foster ongoing improvements” (Watts and Hahn 1993, p. 12), or likewise, as “any effort of a
buying firm with its supplier to increase the performance and/or capabilities of the supplier and
meet the buying firm’s supply needs.” (Krause and Ellram 1997a, p. 21). In essence, supplier
development can aim at improving the product sourced from a supplier and/or at capabilities of
the deficient supplier as classified by Day (1994) in the hope that underlying processes of the
supplier which are critical for the customer firm are upgraded as a result of the customer firm’s
supplier development effort.
Recognizing the long-term and strategic benefits of supplier development, many companies have
established supplier development programs and teams in recent years. John Deere, for example,
relies on a systematic supplier development approach to upgrade suppliers’ just-in-time
capabilities. Working with John Deere’s supplier development teams, suppliers were able to
achieve dramatic cycle time reductions (Golden 1999). The BP (“Best Practice, Best Process, and
Best Performance”) supplier development program of Honda of America performed by a
dedicated supplier development group supports suppliers in adopting the Kaizen philosophy for
continuous improvement and organizational change (MacDuffie and Helper 1997). Through
consulting and problem solving teams of Toyota’s Operations Management Consulting Division
(OMCD) in Japan and the Toyota Supplier Support Center (TSSC) in the United States, a large
number of suppliers has received assistance from Toyota in building up lean manufacturing
capabilities. These organizational capabilities benefited the suppliers and Toyota on the long run
(Dyer and Nobeoka 2000; Sako 1999). Other examples are the Kaizen seminars of Porsche (with
support of consultants from Porsche Consulting), the PICOS (Purchased Input Concept
6
Optimization with Suppliers) program of General Motors, or the Allen Bradley HPM (High
Performance Manufacturing) supplier consortium. Although, the authors of these prominent
examples report substantial performance improvements and claim positive relationships between
supplier development programs and the firms’ competitiveness, all studies were of qualitative
nature, limiting the generalizability of the findings. In addition, the dominance of these firms in
their supply chains, their size and channel power may not be representative. This present research
overcomes these drawbacks by operationalizing a supplier development model and statistically
testing effects on supplier improvement and the customer firms’ competitive advantage with a
sample of firms from various industries and of different sizes.
A firm’s efforts to develop suppliers with the aim to achieve positive outcomes for its own
competitiveness is a two-stage process. First, the firm performs supplier development activities,
resulting in supplier firm improvements. The supplier will be able to deliver products of higher
quality and with a better delivery performance. Alternatively the customer firm can benefit from
enhanced supplier capabilities. Such capabilities are in particular inside-out processes such as
manufacturing and transformation processes, and spanning processes such as customer service
delivery or customer order fulfillment (Day 1994). A higher level of delivery performance and
capabilities, in turn, will positively influence the customer firm’s attainment of competitive
advantage. Figure 1 depicts the supplier development framework underlying this paper. The
hypotheses pertaining to this framework are developed next.
2.2. Effects of supplier development activities on supplier improvement
An important distinction of supplier development activities concerns the role of the buying firm
in terms of the resources committed to a supplier. In case of “direct” (also called “internalized”)
supplier development, the buying firm plays an active role and dedicates human and/or capital
7
resources to a specific supplier (Krause, Scannell, and Calantone 2000; Monczka, Trent, and
Callahan 1993). From a transaction cost perspective, direct supplier development stands for a
transaction-specific investment by the buying firm (Williamson 1991). Besides the provision of
equipment or capital, direct supplier development includes mainly activities such as on-site
consultation, education and training programs, temporary personnel transfer, inviting supplier’s
personnel, taken as a whole, the transfer of knowledge and qualifications into the supplier’s
organization (Krause 1997; Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan
1993).
For a supplier in general, and a deficient supplier in particular, the customer firm can be a crucial
outside source of valuable knowledge which can help the supplier in implementing measures to
upgrade its engineering, logistics, manufacturing and other capabilities on the long run, or to
immediately improve the production and delivery of a particular product. Several authors have
hinted to the fact that suppliers can greatly benefit that way if they are able to integrate such
external knowledge (Dyer and Nobeoka 2000; Kogut 2000). Others have hinted to the critical
role of direct supplier development for achieving performance and capability improvements
(Krause, Scannell, and Calantone 2000). Thus, if firms engage in direct supplier development
with deficient suppliers, they can expect an improvement of these suppliers’ capabilities and their
product and delivery performance. We hypothesized:
H1:
There is a positive relationship between the customer firm’s direct supplier development
activities and the supplier firm’s capabilities.
H2:
There is a positive relationship between the customer firm’s direct supplier development
activities and the supplier firm’s product and delivery performance.
8
Contrary to direct supplier development, the buying firm commits no or only limited resources to
a specific supplier in case of “indirect” (also called “externalized”) supplier development
(Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan 1993). Instead, the firm
offers incentives or enforces suppliers to improve, hence, makes use of the external market to
encourage performance improvement. This is frequently done by assessing suppliers,
communicating supplier evaluation results and performance goals, increasing a supplier’s
performance goals, instilling competition by the use of multiple sources or promising future
business (Krause 1997; Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan
1993; Prahinski and Benton 2004).
As there is no active involvement of the buying firm. Know-how transfer from the buying firm to
the supplier does not occur, i.e. the supplier will not be able to upgrade its capabilities or
organizational processes. However, if the supplier wants to maintain business with the customer
firm, measures of indirect supplier development will compel the supplier to put additional efforts
(time, labor, quality inspection, input material of higher quality etc.) in the production and
delivery of the product. This can happen without an upgrade of critical capabilities. Therefore,
while indirect supplier development can be associated with an improved product and delivery
performance, we do not expect an improvement of the supplier’s capabilities. We hypothesize:
H3:
There is a positive relationship between the customer firm’s indirect supplier
development activities and the supplier firm’s product and delivery performance.
A few empirical studies indicate that firms in corporate practice combine indirect and direct
supplier development measures. That is, on the one hand, buying firms utilize the market forces
to compel suppliers to improve, and on the other hand they engage actively in the development of
the deficient supplier (Krause 1997; Monczka, Trent, and Callahan 1993). In the present study
9
the direct and indirect supplier development constructs are also highly correlated at 0.43 (see
Appendix 1). Several authors emphasized that a cooperative buyer-supplier relationship is vital
for the success of direct supplier development activities. For example, MacDuffie and Helper
(1997, p. 148) conclude from their study of Honda’s supplier development program that “a
supplier-customer relationship which generates high motivation for learning and high trust
between provider and recipient is a crucial condition” for creating lean suppliers. Likewise,
Prahinski and Benton (2004) found, that the buyer-supplier relationship, cooperation, and
commitment on both sides are important prerequisites for supplier development programs to be
successful.
Because the cooperativeness of the buyer-supplier relationship is a key success factor, we
question that direct and indirect supplier development efforts should be combined. Indirect
measures, such as setting improvement goals or instilling competition among suppliers rather
reduce commitment, trust and cooperation. While the previous hypotheses acknowledged that
each supplier development strategy (direct and indirect) will work in isolation, we posit that
combining these strategies will have a negative impact on supplier firm improvement. Therefore,
we hypothesize:
H4:
The combined effect of direct and indirect supplier development activities results in
lower levels of supplier firm capabilities.
H5:
The combined effect of direct and indirect supplier development activities results in
lower levels of supplier firm product and delivery performance.
10
2.3. Effects of supplier improvement on competitive advantage
To achieve competitive advantage, the firm must create positive value which equals or exceeds
that of competitors. A firm has latitude in deciding which competitive strategy to choose, with
equal levels of consumer surplus at equilibrium. Competitive advantage can be obtained by
offering superior value to the customer through either unique benefits that offset a higher price or
lower prices than competitors for equivalent benefits. As such, both differentiation strategies and
cost leadership strategies can lead to sustained competitive advantage, which in turn leads to
superior financial performance (Day and Wensley 1988; Hambrick 1983; Porter 1980). The
firm’s suppliers can contribute to both, a differentiation as well as a cost leadership strategy.
Customer firms pursuing a differentiation strategy can greatly benefit from upgraded supplier
capabilities. Upgraded capabilities (e.g., new product development, service development,
customer service delivery, customer order fulfillment) which support suppliers to serve their
customers in a better way as compared to before the implementation of the supplier development
activities will support the customer’s differentiation strategy through high product availability,
short delivery times, or high product quality, for example (Day 1994). When suppliers possess
superior marketing and technology management capabilities, their product development activities
will be more effective and they will be able to turn out more innovative and reliable products
with a short time-to-market (Griffin and Hauser 1996; Moorman and Slotegraaf 1999). By
exercising such capabilities through organizational processes suppliers will be able to better
support their customer’s differentiation strategy.
Although, improved supplier capabilities, which are embedded within the supplier organization,
have a rather medium- to long-term focus and are likely to sustain over a longer period of time,
improving the supplier firm’s delivery performance or quality of a specific product can also have
11
a positive impact on the customer firm’s attainment of a differentiation strategy (more immediate
and only short-term) (Hartley and Jones 1997). The customer firm might be able to increase their
customers’ satisfaction if a supplier is able to reduce lead times for a product, delivery reliability
or product quality, for example.
While improved supplier capabilities can substantially assist the customer firm in its attainment
of a differentiation strategy, better product and delivery performance can also help (though to a
lower degree) firms in the attainment of a differentiation strategy (LaLonde, Cooper, and
Noordewier 1988). We hypothesize:
H6:
There is a positive relationship between the supplier firm’s capabilities and the customer
firm’s attainment of a differentiation strategy.
H7:
There is a positive relationship between the supplier firm’s product and delivery
performance and the customer firm’s attainment of a differentiation strategy.
Offering of lower prices can in the long run only be supported with lower costs. Because cost of
materials account for the major portion of total costs in many industries, material cost reductions
and related costs (i.e., inventory costs for purchased materials) are a vital source for cost
reductions. Suppliers can also upgrade their cost control capabilities in operations as a result of
their customer’s supplier development activities (Day 1994). A recent study has shown that
external learning and knowledge transfer among firms and their suppliers upgrades the firms’
manufacturing capabilities and subsequently manufacturing performance (Schroeder, Bates, and
Junttila 2002). More efficient manufacturing processes, fewer manufacturing downtimes, better
utilization of capacity, or less scrap and rework, for example, will result in lower costs for the
12
product. The supplier can share cost savings with its customer, hence, the customer’s cost
leadership strategy is also supported.
If suppliers realize improvements in terms of cost reductions in their own processes and products,
they can pass a share of these cost reductions on to the customer firm. This might be an incentive
for the customer firm to help suppliers to upgrade product and delivery performance or cost
reduction capabilities. In a nutshell we hypothesize:
H8:
There is a positive relationship between the supplier firm’s capabilities and the customer
firm’s attainment of a cost leadership strategy.
H9:
There is a positive relationship between the supplier firm’s product and delivery
performance and the customer firm’s attainment of a cost leadership strategy.
3.
Research method
3.1. Data collection and sample
To test these hypotheses, data were collected through a survey which was administered to
industrial and service firms in Germany, Switzerland and Austria. From the 251 targeted firms,
the responses of 60 were finally used for this study, accounting for an effective response rate of
23.9%. About 30.9% of the responding firms had an annual sales volume of US$ 100 million or
less, 18.2% had between US$ 100 million to US$ 250 million, 21.8% between US$ 250 million
and US$ 1 billion, 21.8% between US$ 1 billion and 5 billion and 7.3% of more than US$ 5
billion. The average annual sales volume was US$ 1.56 billion. A wide variety of industrial firms
is represented in the sample: electro and electronics (10.0%), high-tech (15.0%), automotive
(6.7%), machinery and plant construction (18.3%), construction (6.7%), chemicals and
pharmaceuticals (6.7%), food (3.3%), textiles (3.3%), other manufacturing (18.3%). Service
13
firms were in telecommunications (5.0%), banking and insurance (3.3%), and other services
(3.3%).
Key informants targeted were purchasing or supply chain management executives. These
informants are likely to have an overarching, boundary-spanning view of their companies’
supplier development activities (Hallenbeck, Hautaluoma, and Bates 1999; Jemison 1984). The
majority of informants included in this sample held titles as head of purchasing (61.7%) and head
of supply chain management, logistics or materials management (20.0%). The remainder
characterized their position as purchasing or commodity managers (11.7%), head of supplier
development, procurement information manager, or quality manager (6.7%). They have worked
in this position for 5.3 year and with the firm for 7.0 years on average
The firms were asked to answer the questions with respect to one particular supplier development
they have carried out. Therefore, the units of analysis in this research are not the buying firms’
supplier development activities in general, instead, the activities performed and results achieved
in the development of an individual supplier (“supplier X”). On average, the firms have
maintained relationships with the suppliers for about 12 years prior to their development, ranging
from 1 to 50 years. Furthermore, from the total of 60 supplier development incidents in our
sample, 50 pertain to suppliers delivering products. These products range from printed circuit
boards, electronic assemblies, mobile phone handsets, plastics moldings and hydraulic power
units to chemicals, flavoring and tomato puree. A total of 10 supplier developments concern
suppliers of services, such as logistics services, mechanical processing, electric installation or
facility management services. As can be seen, the supplier development activities included in this
study cover a broad spectrum of products and services, thus enhancing the robustness and
generalizability of the results.
14
3.2. Survey instrument and measures
The survey instrument and measures were developed in several stages. First, a preliminary
questionnaire was drafted on the basis of the pertinent literature and case studies conducted by
the authors in prior research projects. Second, a number of academicians and practitioners
commented on the items included in the questionnaire, their relevance, their comprehensibility,
as well as the questionnaire format. Third, to further refine the survey instrument, it was pretested through in-depth interviews with purchasing executives from a small number of firms.
Again, their comments were incorporated in the final version.
Multiple-item measures were used to assess all main constructs on five-point Likert scales.
Translated descriptions of the specific measures and items used in this study, descriptive statistics
and the correlations of summated composites are included in Appendix 1 and 2.
Supplier development was measured in terms of direct and indirect activities. The direct supplier
development construct consists of activities where firms invest human and/or capital resources in
a specific supplier. Seven items were selected from prior studies which have assigned a range of
activities to direct development (Krause 1997; Krause, Scannell, and Calantone 2000; Monczka,
Trent, and Callahan 1993). Principal component factor analysis assigned all of the seven items to
one construct factor with satisfactory internal consistency (α = 0.83). The indirect supplier
development construct indicates to what extent the buying firms have enforce or encouraged
suppliers to improve, without becoming actively involved in the improvement process. It was
measured by four items which where also drawn from a list of indirect supplier development
activities suggested in prior studies (Krause 1997; Krause, Scannell, and Calantone 2000;
Monczka, Trent, and Callahan 1993). Principal component factor analysis assigned all items to a
single factor. The scale showed a satisfactory level of reliability with α = 0.78.
15
For the supplier firm improvement constructs, four items measured the improvement of supplier
capabilities. The respondents had to evaluate whether the supplier strengthened a variety of
critical capabilities (e.g., manufacturing, product development) as a result of the buying firm’s
supplier development efforts. Principal component factor analysis assigned all four items to one
single factor, and the scale showed reliability which is acceptable for new scales (α = 0.68).
Product and delivery performance, the second supplier improvement construct, assesses the
bearing of the buying firm’s supplier development efforts on the product and the supplier’s
delivery performance – disregarding whether the supplier was able to upgrade skills or
competences. From the buying firm’s perspective, the question is, whether it received a product
of better quality, or whether the supplier delivered faster and more reliable, for example. This
construct, which shows satisfactory reliability (α = 0.81) is based on four items.
To capture the impact of supplier firm improvement on the customer firm’s competitive
advantage through differentiation, we developed a five item scale based on product and service
attributes that potentially contribute to the perceived superiority of a product. These (external
oriented) attributes can be based on the product itself, the firm’s marketing approach, the delivery
system, or customer service (Dickson and Ginter 1987; Porter 1980). A high score on these
items, hence on the differentiation construct, would support the buying firm’s differentiation
strategy. Example items used in this study are the reduction of the buying firm’s time-to-market
due to supplier improvements or the ability to offer more innovative products. Principal
component factor analysis assigned these five items to a single factor. The scale showed
satisfactory reliability (α = 0.86). Similarly, cost leadership measures the degree to which the
firm’s cost leadership strategy is supported due to supplier improvements. Items supporting such
a strategy emphasize cost reductions from all (predominantly internal) sources and by performing
16
value chain activities at a lower cost than competitors (Porter 1980; Porter 1985). As such, cost
reductions resulting from supplier improvements were assessed in terms of material costs,
inventory costs, or manufacturing costs, for example. The six items loaded on one factor and the
construct turned out to be reliable (α = 0.79).
Krause and Ellram (1997b) point out, that the financial resources of larger firms make them more
successful in their supplier development efforts. As firm size can be a be a potential source of
variance that confounds research findings, we included firm size as control variable in our
analysis when we tested the effect of supplier development activities on supplier firm
improvements. This control variable was measured by a single item asking respondents for their
firms’ annual dollar sales volume.
4.
Results
In order to test our research hypotheses, four ordinary least square (OLS) regression models were
estimated. Table 1 presents the standardized parameter estimates and t-values resulting from
these models.
The first set of hypotheses pertains to the effect of supplier development activities on supplier
improvement. Overall, the two equations testing H1 - H5 were statistically significant. For
supplier capabilities, F = 7.64 (df = 50, 4) and the buying firm’s supplier development activities
explained 38% of the variance. For product and delivery performance, F = 2.78 (df = (50, 4) with
18% of the variance explained. For the control variable of firm size, results indicate that the
parameter estimates were not statistically significant. H1, that direct supplier development
activities of the buying firm are positively related to supplier’s capabilities was supported with a
statistically significant estimate of 0.424 (t = 3.39, p < 0.01). However, for the effect of direct
17
supplier development on product and delivery performance, as proposed in H2, the data did not
reveal a statistically significant relationship. Therefore, H2 was not supported. H3 posits a
positive relationship between direct supplier development and product and delivery performance.
With a standardized parameter estimate of 0.275, this hypothesis was significant (t = 1.94, p <
0.05), indicating support for H3. H4 and H5 involve the combined effect of direct and indirect
supplier development on supplier firm improvement. For both dependent variables, our results
clearly indicate that combining direct and indirect supplier development measures has a negative
impact on supplier firm improvements. The combined effect is significant with a standardized
parameter estimate of -0.250 for supplier capabilities (t = -2.16, p < 0.05) and -0.266 for product
and delivery performance (t = -2.00, p < 0.05), suggesting support for H4 and H5.
The second set of hypotheses addresses the effect of supplier firm improvement on customer firm
competitive advantage. Both equations testing H6 - H9 were statistically significant and explained
substantial variance. The two supplier firm improvement measures account for 44% of the
variance with differentiation strategy as dependent variable (F = 21.96, df = 56, 2), and for 39%
of the variance with cost leadership as dependent variable (F = 18.01, df = 57, 2). The highly
significant standard estimate of 0.633 shows, that the improvement of the suppliers’ capabilities
is strongly related to the attainment of the customer firms’ differentiation strategy (t = 5.61, p <
0.01). Hence, H6 is supported. In H7, we expected that a higher level of the supplier’s product and
delivery performance would also enhance the attainment of the customer firm’s differentiation
strategy. The standardized estimate was not statistically significant, indicating no support for H7.
H8 and H9 addressed the effects of supplier capability improvement and product and delivery
performance improvement on the customer firm’s cost leadership strategy. Both standardized
parameter estimates were statistically significant: for supplier capabilities, the estimate was 0.483
18
(t = 4.17, p < 0.01), and for product and delivery performance, the estimate was 0.233 (t = 2.01, p
< 0.05), indicating support for H8 and H9.
5.
Discussion and implications
The goal of the current study was to investigate if and how the development of deficient suppliers
can contribute to the achievement of competitive advantage for the customer firm. Our results
substantiate that supplier development can support the customer firm’s differentiation and/or cost
leadership strategy, i.e. contribute to competitive advantage.
Fundamentally, we find that the two types of supplier development (direct vs. indirect) have
distinct effects on supplier capability improvements and product and delivery performance
improvements. More specifically, the results suggest support for the individual positive effect of
direct supplier development on supplier capability improvement and the individual positive effect
of indirect supplier development on product and delivery performance improvement. However,
contrary to our expectations, direct supplier development activities do not result in an upgrade of
the supplier’s product and delivery performance.
Furthermore, we expected that direct and indirect supplier development activities in combination
would bring down the improvement of supplier capabilities and product and delivery
performance. Both hypotheses regarding the negative combined effects were supported. This
underlines that it is important that firms engage either in direct or indirect supplier development.
This finding is along the lines of Dyer, Cho, and Chu’s (1998) notion of “supplier segmentation”
which contrasts durable arm’s-length with strategic partnership buyer-seller relations. While the
first relates to price benchmarking and minimal assistance of the buyer firm, the second is
19
characterized through capabilities benchmarking and considerable assistance, i.e. “substantial
investments in interfirm knowledge-sharing routines” (Dyer, Cho, and Chu 1998, p. 72).
With respect to the impact of supplier development on the attainment of the customer firm’s
differentiation respectively cost leadership strategy, our results reveal that improved supplier
capabilities can be a powerful support for both strategies (considering the large standardized
parameter estimates of 0.633 and 0.483). The supplier’s product and delivery performance
improvement, on the other hand, only backs up a cost leadership strategy. Overall, the results
emphasize the vital role of supplier capability improvements, that is, the long-term focused
upgrading of capabilities embedded in the supplier’s organization (Day 1994; Hartley and Jones
1997).
5.1. Limitations of the study
This study’s results must be viewed in conjunction with its limitations. First, the small sample
size limits statistical power. Hence, while this study provides support for seven out of nine
hypotheses with statistically significant results, it does not provide the statistical power to firmly
dismiss the relationships that failed to show statistically significant results. Second, as this
research is cross-sectional in nature, it cannot establish causality between variables. Only a
longitudinal research design could provide better answers to questions of causality as well as the
evolution of key variables such as supplier capability improvements or product and delivery
performance improvements over time, e.g., over the duration of the buyer-supplier relationship.
Third, the data for our analysis are based on supplier development activities performed by
companies from Germany, Austria, and Switzerland. This might restrict the immediate
generalizability of our findings to other geographical areas such as North America or Asia.
20
5.2. Managerial implications
Firms which possess the strategies, structures, and capabilities to engage in supplier development
when performance problems with suppliers arise, are equipped to exploit this powerful interfirm
relationship management practice as a source of competitive advantage for their organization.
Therefore, firms are advised to build up a systematic supplier development process in order to be
able to identify, evaluate, conduct and follow up on supplier development projects. The sevenstep supplier development process proposed by Handfield, Krause, Scannell, and Monczka
(2000) can be taken as a starting point.
From a practical standpoint managers must be aware of the different routes to customer firm
competitive advantage as a result of supplier development. The first key finding of this research
is that the buying firm can significantly foster both types of competitive advantage (i.e.,
differentiation and cost leadership) by upgrading the deficient supplier’s capabilities through
direct supplier development. Second, firms should only develop a deficient supplier through
indirect supplier development measures if it seeks support for a cost leadership strategy.
Therefore, if the buying firm pursues a differentiation strategy and is not able or willing to invest
human and financial resources in the development of the deficient supplier, it should rather stay
away from supplier development and switch to an alternative supplier. Third, firms should carry
out either direct or indirect supplier development activities with a particular supplier at the same
time or apply these different approaches consecutively.
One broader, very important implication for managers involved in supplier relationship
management can be drawn. Although, the awareness of purchasing and supply chain managers of
their firm’s strategic directions and their involvement in the development of top-level strategies
has increased in corporate practice in the past decade, this is still a critical issue (Cousins and
21
Spekman 2003; Watts, Kim, and Hahn 1992). These managers must be fully aware of their
organization’s marketing or business unit strategy in order to make the right decision when
supplier problems arise, because their decision whether to switch to an alternative supplier or
engage in supplier development activities clearly depends on their organization’s avenue to
competitive advantage and the availability of resources.
In sum, our study offers important groundwork for understanding the important link between
supplier development and its impact on the customer firm’s competitive advantage, i.e. provides
a justification for the compelling performance implications of this interfirm relationship
management practice.
22
References
Anderson, Erin and Barton Weitz. 1992. “The use of pledges to build and sustain commitment in
distribution channels.” Journal of Marketing Research 29 (February): 18-34.
Anderson, James C. and James A. Narus. 1990. “A model of distributor firm and manufacturer
firm working partnerships.” Journal of Marketing 54 (January): 42-58.
Buvik, Arnt and Torger Reve. 2001 “Asymmetrical deployment of specific assets and contractual
safeguarding in industrial purchasing relationships.” Journal of Business Research 51
(February): 101-113.
Chapman, Timothy L., Jack J. Dempsey, Glenn Ramsdell, and Michael R. Reopel. 1997.
“Purchasing: No time for lone rangers.” The McKinsey Quarterly 34 (2): 30-40.
Cousins, Paul D. and Robert E. Spekman. 2003. “Strategic supply and the management of interand intra-organisational relationships.” Journal of Purchasing & Supply Management 9
(January): 19-29.
Day, George S. 1994. “The capabilities of market-driven organizations.” Journal of Marketing 51
(October): 37-52.
Day, George S. and Robin Wensley. 1988. “Assessing advantage: A framework for diagnosing
competitive superiority.” Journal of Marketing 52 (April): 1-20.
Demski, Joel S., David E. M. Sappington, and Pablo T. Spiller. 1987. “Managing supplier
switching.” The Rand Journal of Economics 18 (Spring): 77-97.
Dickson, Peter R. and James L. Ginter. 1987. “Market segmentation, product differentiation and
marketing strategy.” Journal of Marketing 51 (April): 1-10.
Doney, Patricia M. and Joseph P. Cannon. 1997. “An examination of the nature of trust in buyerseller relationships.” Journal of Marketing 61 (April): 35-51.
Dyer, Jeffrey H. and Kentaro Nobeoka. 2000. “Creating and managing a high-performance
knowledge-sharing network: The Toyota case.” Strategic Management Journal 21 (March):
345-367.
23
Dyer, Jeffrey H., Dong Sung Cho, and Wujin Chu. 1998. “Strategic supplier segmentation: The
next ‘best practice’ in supply chain management.” California Management Review 40
(Winter): 57-77.
Frazier, Gary L., Robert E. Spekman, and Charles R. O’Neal. 1988. “Just-in-time exchange
relationships in industrial markets.” Journal of Marketing 52 (October): 52-67.
Fritsch, Michael and Rolf Lukas. 2001. “Who cooperates on R&D?” Research Policy 30
(February): 297-312.
Golden, Peter. 1999. “Deere on the run: Quick response manufacturing drives supplier
development at John Deere.” IIE Solutions 31 (July): 24-31.
Griffin, Abbie and John R. Hauser. 1996. “Integrating R&D and marketing: A review and
analysis of the literature.” Journal of Product Innovation Management 13 (May): 191-215.
Hallenbeck, George S. Jr., Jacob E. Hautaluoma, and Scott C. Bates. 1999. “The benefits of
multiple boundary spanning roles in purchasing.” The Journal of Supply Chain Management
35 (Spring): 38-43.
Hambrick, Donald C. 1983. “High profit strategies in mature capital goods industries: A
contingency approach.” Academy of Management Journal 26 (December): 687-707.
Handfield, Robert B., Daniel R. Krause, Thomas V. Scannell, and Robert M. Monczka. 2000.
“Avoid the pitfalls in supplier development.” Sloan Management Review 41 (Winter): 37-49.
Hartley, Janet L. and Gwen E. Jones. 1997. “Process oriented supplier development: Building the
capability for change.” International Journal of Purchasing and Materials Management 33
(Summer): 24-29.
Heberling, Michael E., Joseph R. Carter, and John H. Hoagland. 1992. “An investigation of
purchases by American businesses and governments.” International Journal of Purchasing
and Materials Management 28 (Fall): 39-45.
Heide, Jan B. and George John. 1988. “The role of dependence balancing in safeguarding
transaction-specific assets in conventional channels.” Journal of Marketing 52 (January):
20-35.
24
Heide, Jan B. and George John. 1992. “Do norms matter in marketing relationships?” Journal of
Marketing 56 (April): 32-44.
Jap, Sandy D. 1999. “Pie-expansion efforts: Collaboration processes in buyer-supplier
relationships.” Journal of Marketing Research 26 (November): 461-475.
Jemison, David B. 1984. “The importance of boundary spanning roles in strategic decisionmaking.” Journal of Management Studies 21 (April): 131-152.
Johnson, Jean L. 1999. “Strategic integration in industrial distribution channels: Managing the
interfirm relationship as a strategic asset.” Journal of the Academy of Marketing Science 27
(Winter): 4-18.
Kalwani, Manohar U. and Narakesari Narayandas. 1995. “Long-term manufacturer-supplier
relationships: Do they pay off for supplier firms?” Journal of Marketing 59 (January): 1-16.
Kogut, Bruce. 2000. “The network as knowledge: Generative rules and the emergence of
structure.” Strategic Management Journal 21 (March): 405-425.
Krause, Daniel R. 1997. “Supplier development: Current practices and outcomes.” International
Journal of Purchasing and Materials Management 33 (Spring): 12-19.
Krause, Daniel R. and Lisa M. Ellram. 1997a. “Critical elements in supplier development.”
European Journal of Purchasing & Supply Management 3 (March): 21-31.
Krause, Daniel R. and Lisa M. Ellram. 1997b. “Success factors in supplier development.”
International Journal of Physical Distribution & Logistics Management 27 (1): 39-52.
Krause, Daniel R., Thomas V. Scannell, and Roger J. Calantone. 2000. “A structural analysis of
the effectiveness of buying firms’ strategies to improve supplier performance.” Decision
Sciences 31 (Winter): 33-55.
LaBahn, Douglas W. and Robert E. Krapfel. 1999. “Early supplier involvement in customer new
product development: A contingency model of component supplier intentions.” Journal of
Business Research 47 (March): 173-190.
LaLonde, Bernard J., Martha C. Cooper, and Thomas G. Noordewier. 1988. Customer service: A
management perspective. Oak Brook, IL: Council of Logistics Management.
25
Langlois, Richard N. and Paul L. Robertson. 1989. “Explaining vertical integration: Lessons
from the American automobile industry.” Journal of Economic History 49 (June): 361-375.
MacDuffie, John Paul and Susan R. Helper. 1997. “Creating lean suppliers: Diffusing lean
production throughout the supply chain.” California Management Review 39 (Summer):
118-151.
Mohr, Jakki J. and John R. Nevin. 1990. “Communication strategies in marketing channels: A
theoretical perspective.” Journal of Marketing 54 (October): 36-51.
Mohr, Jakki J. and Ravipreet S. Sohi. 1995. “Communication flows in distribution channels:
Impact of assessments of communication quality and satisfaction.” Journal of Retailing 71
(Winter): 393-416.
Monczka, Robert M., Robert Trent, and Thomas Callahan. 1993. “Supply base strategies to
maximize supplier performance.” International Journal of Physical Distribution & Logistics
Management 23 (4): 42-54.
Monteverde, Kirk and David J. Teece. 1982. “Supplier switching costs and vertical integration in
the automobile industry.” The Bell Journal of Economics 13 (Spring): 206-213.
Moorman, Christine and Rebecca J. Slotegraaf. 1999. “The contingency value of complementary
capabilities in product development.” Journal of Marketing Research 36 (May): 239-257.
Mowery, David C., Joanne E. Oxley, and Brian S. Silverman. 1996. “Strategic alliances and
interfirm knowledge transfer.” Strategic Management Journal 17 (Winter): 77-91.
Noordewier, Thomas G., George John, and John Nevin. 1990. “Performance outcomes of
purchasing arrangements in industrial buyer-vendor relationships.” Journal of Marketing 54
(October): 80-93.
Porter, Michael E. 1980. Competitive strategy: Techniques for analyzing industries and
competitors. New York: The Free Press.
Porter, Michael E. 1985. Competitive advantage: Creating and sustaining superior performance.
New York: The Free Press.
Prahinski, Carol and W. C. Benton. 2004. “Supplier evaluations: Communication strategies to
improve supplier performance.” Journal of Operations Management 22 (February): 39-62.
26
Sako, Mari. 1999. “From individual skills to organizational capability in Japan.” Oxford Review
of Economic Policy 15 (Spring): 144-126.
Sambandam, Rajan and Kenneth R. Lord. 1995. “Switching behavior in automobile markets: A
consideration-sets model.” Journal of the Academy of Marketing Science 23 (Winter): 57-65.
Schroeder, Roger G., Kimberly A. Bates, and Mikko Junttila. 2002. “A resource-based view of
manufacturing strategy and the relationship to manufacturing performance.” Strategic
Management Journal 23 (February): 105-117.
Von Hippel, Eric. 1988. The sources of innovation. New York: Oxford University Press.
Waters-Fuller, Niall. 1995. “Just-in-time purchasing and supply: A review of the literature.”
International Journal of Operations & Production Management 15 (9): 220-236.
Watts, Charles A. and Chan K. Hahn. 1993. “Supplier development programs: An empirical
analysis.” International Journal of Purchasing and Materials Management 29 (Spring): 1117.
Watts, Charles A., Kee-Young Kim, and Chan K. Hahn. 1992. “Linking purchasing to corporate
competitive strategy.” International Journal of Purchasing and Materials Management 28
(Fall): 2-8.
Williamson, Oliver E. 1991. “Comparative economics organization: The analysis of discrete
structural alternatives.” Administrative Science Quarterly 36 (June): 269-296.
27
Appendix 1. Measures used in this study
Scale name (scale mean; standard deviation) and questionnaire items1)
Reliability2)
Direct supplier development (2.74; 0.94)
Our firm has undertaken supplier development with supplier X through …
… giving manufacturing related advice (e.g., processes, machining process, machine set up).
… training of employees from supplier X.
… the transfer of employees to supplier X.
… giving product development related advice (e.g., processes, project management).
… giving technological advice (e.g., materials, software).
… giving quality related advice (e.g., use of inspection equipment, quality assurance procedures).
… the transfer of implicit knowledge.
α = 0.83
Indirect supplier development (3.64; 0.97)
Our firm has undertaken supplier development with supplier X through …
… setting improvement targets.
… auditing supplier X.
… providing feedback about performance.
… strong formal supplier evaluation.
α = 0.78
Supplier capabilities (2.98; 0.88)
Through the development of supplier X …
… he was able to strengthen his management capabilities.
… he was able to strengthen his manufacturing capabilities.
… he was able to strengthen his logistics capabilities.
… he was able to strengthen his product development capabilities.
α = 0.68
Product and delivery performance (3.72; 0.89)
Through the development of supplier X …
… the quality of the products purchased from supplier X was improved.
… the replenishment lead time of the products purchased from supplier X was reduced.
… the service of supplier X’s deliveries was improved.
… the reliability of supplier X’s deliveries was improved.
α = 0.81
Differentiation (3.51; 1.10)
Through the development of supplier X our firm was able to …
… reduce time-to-market.
… improve our delivery reliability.
… improve the quality of our products.
… improve the reliability of our products.
… offer more innovative products to our customers.
α = 0.86
Cost leadership (3.60; 0.93)
Through the development of supplier X our firm was able to …
… reduce our total costs.
… reduce our material costs.
… reduce the costs of our products.
… reduce our inventories.
… reduce our manufacturing costs.
… reduce production downtimes.
α = 0.79
1)
2)
Response cues for all scales on a five-point Likert scale: 1: strongly disagree, 5: strongly agree
Cronbach’s alpha coefficient
28
Appendix 2. Correlation matrix
(1)
(1) Direct supplier development
(2)
(3)
(4)
(5)
(6)
n.a.
(2) Indirect supplier development
0.43**
n.a.
(3) Supplier capabilities
0.53**
0.46**
(4) Product and delivery performance
0.11
0.35**
0.45**
(5) Differentiation
0.34**
0.48**
0.66**
0.35**
(6) Cost leadership
0.08
0.40**
0.59**
0.45**
n.a.
n.a.
n.a.
0.57 **
n.a.
** Correlation is significant at the 0.01 level (1-tailed).
Figure 1. Conceptual framework
Supplier
development
activities
Supplier firm
improvements
Customer firm
competitive
advantage
Direct
Supplier
capabilities
Differentiation
H1 - H5
Indirect
H6 - H9
Product and
delivery
performance
29
Cost leadership
Table 1. OLS regression results
Dependent variables
and model summary
Supplier capabilities
Independent
variables
Standardized
estimate
t value
Hypothesis
Result
Firm size
-0.00
-0.02
─
─
Direct supplier development
0.42
3.39 **
H1
Support
+
─
─
Indirect supplier development
0.24
1.95
Direct supplier development X
Indirect supplier development
-0.25
-2.16 *
H4
Support
Firm size
-0.07
-0.53
─
─
Direct supplier development
0.03
0.21
H2
No support
Indirect supplier development
0.28
1.94 *
H3
Support
F(50, 4) = 2.78*; R2 = 0.18
Direct supplier development X
Indirect supplier development
-0.27
-2.00 *
H5
Support
Differentiation
Supplier capabilities
0.63
5.61 **
H6
Support
F(56, 2) = 21.96**; R2 = 0.44
Product and delivery
performance
0.06
0.53
H7
No support
Cost leadership
Supplier capabilities
0.48
4.17 **
H8
Support
F(57, 2) = 18.01**; R2 = 0.39
Product and delivery
performance
0.23
2.01 *
H9
Support
F(50, 4) = 7.64**; R2 = 0.38
Product and delivery
performance
** Significant at the 0.01 level.
* Significant at the 0.05 level.
+
Significant at the 0.10 level.
30