Portfolios of Buyer-Supplier Relationships

During the past few years, the business press and academic literature have been exhorting managers to move away from arm’s-length relationships and move toward longer-term collaborative strategic partnerships with external business partners. This advice comes as a natural reaction to the numerous empirical studies conducted during the past decade that compare Japanese production and supply practices with those of the rest of the world.1 The now mythical link between Toyota’s success and the effective management of its suppliers has led to a leap of faith in Western management circles, where managers and business consultants tout strategic partnerships as the next core competency and source of competitive advantage. In the automobile sector, for example, all three U.S. manufacturers, and most of their European competitors, including Renault, Peugeot, and Volkswagen, have launched programs to decrease their level of vertical integration, reduce their total number of direct suppliers, and move toward publicly declared strategic partnerships.

Do Japanese firms manage primarily by partnerships? Empirical data on supplier relationships in the United States and Japan across a representative set of components and technologies show this common assumption to be unjustified. While strategic partnerships create new value, they are costly to develop, nurture, and maintain. In addition, they are risky, given the specialized investments they require. As an alternative, in this article, I propose and empirically validate a framework for managing a portfolio of relationships. My purpose is to help senior managers answer two key questions. First, which governance structure or relational design should a firm choose under different external contingencies? This is a strategic decision because it affects how a firm defines its boundaries and core activities. Second, what is the appropriate way to manage each different type of relationship? This is an organizational question.

Types of Relationships

As part of a broader project on supplier relationships, I administered a survey questionnaire, in English and Japanese, to a total of 447 managers in all three U.S. and eleven Japanese automobile manufacturers.2 Each informant or boundary spanner (i.e., a purchasing agent or engineer) responded for only one product and one supplier for which he or she was responsible.

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References

1. M. Cusumano and A. Takeishi, “Supplier Relations and Management: A Survey of Japanese, Japanese-Transplant, and U.S. Auto Plants,” Strategic Management Journal, volume 12, November 1991, pp. 563-588;

J.H. Dyer and W.G. Ouchi, “Japanese-Style Business Partnerships: Giving Companies a Competitive Edge,” Sloan Management Review, volume 35, Fall 1993, pp. 51-63;

S. Helper and M. Sako, “Supplier Relations in Japan and the United States: Are They Converging?” Sloan Management Review, volume 36, Spring 1995, pp. 77-84;

T. Nishiguchi, Strategic Industrial Sourcing: The Japanese Advantage (Oxford: Oxford University Press, 1992); and

M. Smitka, Competitive Ties: Subcontracting in the Japanese Automotive Industry (New York: Columbia University Press, 1991).

2. For information on the research project, see:

M. Bensaou and N. Venkatraman, “Configurations of Interorganizational Relationships: A Comparison between U.S. and Japanese Automakers,” Management Science, volume 41, number 9, 1995, pp. 1471–1492; and

M. Bensaou, “Interorganizational Cooperation: The Role of Information Technology. An Empirical Comparison of U.S. and Japanese Supplier Relations,” Information Systems Research, volume 8, number 2, 1997, pp. 107–124.

In the data-collection process, sampling followed the same procedure in all three U.S. and eleven Japanese car companies. Senior managers at the central division or platform level were asked to select a set of car components under their responsibility from the stratified list of fifty components prepared by the researcher (i.e., to prevent selection bias). For each of the selected components, they helped identify the individual purchasing agents and/or engineers to whom I could send the questionnaire. The final decision about which specific supplier (the respondent’s name and the name of the supplier were not asked) and which part number to choose was at the respondent’s discretion. The data were collected in 1991 with a 43 percent total response rate; n = 140 in the United States and n = 307 in Japan.

3. For instance, “buyer’s asset specificity” is significantly correlated:

at the .40 level (p < .001) with an 8-item scale of cooperation between buyer and supplier;

at the .10 level (p < .05) with the scope of the relationship, i.e., the number of products provided by the supplier;

at the .16 level (p < .01) with a 3-item scale of the level of trust;

at the .22 level (p < .001) with the extent to which the benefits, burden, and risks are perceived to be shared fairly within the relationship;

at the .18 level (p < .001) with the expectation of continuity of the relationship in the long term;

at the .25 level (p < .001) with the extent of visits exchanged between the two parties.

4. J.H. Dyer, “Specialized Supplier Networks as a Source of Competitive Advantage: Evidence from the Auto Industry,” Strategic Management Journal, volume 17, April 1996, pp. 271–291;

and J.H. Dyer, “Dedicated Assets: Japan’s Manufacturing Edge,” Harvard Business Review, volume 72, November-December 1994, pp. 174–178.

Dyer (1996) has empirically shown the link between asset specificity and performance and has described suppliers’ dedicated assets as the source of Japanese manufacturers’ superior performance and the foundation of their close relationship with their network of suppliers. “Most competitors know that a key to the success of Japanese network relationships is the practice of dedicating supplier assets to the customer.” Dyer (1994), p. 174.

5. The structure of the various component markets (as well as the car market) differs across the United States and Japan, even for similar components. Similarly, the commercial and competitive availability of similar technologies may vary across the two national markets. The data I collected consist of relationships only between U.S. automakers and their U.S. suppliers within the U.S. market and relationships between Japanese automakers and their Japanese suppliers within the Japanese market. In addition, these external contingencies may vary over time, e.g., the entry of Japanese and European automakers starting in the 1970s. See:

S. Helper, “Strategy and Irreversibility in Supplier Relations: The Case of the U.S. Automobile Industry,” Business History Review, volume 65, Winter 1991, pp. 781–824.

6. See K. Sakai, “The Feudal World of Japanese Manufacturing,” Harvard Business Review, volume 68, November–December 1990, pp. 38–49.

7. See Dyer (1994).

8. In this article, I suggest that these practices, such as trust, fairness, and extensive cooperation are characteristics of well-performing strategic partnerships more than characteristics of Japanese supplier relations. The national differences are reflected in the frequency of each type of relationship in each country.