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How supply chain complexity affects buyer-supplier relationships
"Multimarket Contact and the Use of Power in Buyer-Supplier Relationships," by Felix Reimann, Pei Shen, and Lutz Kaufmann of WHU-Otto Beisheim School of Management in Germany. Published in the March 2017 issue of Journal of Business Logistics.
Large buyers and sellers often work together in different geographies or product markets. This means they have more than one business relationship with one another, also known as "multimarket contact." In these types of situations, what happens in one market can influence what happens in another. The authors believe this has a notable impact on how companies wield the power or influence they have with their business partners. For example, before a company pressures a supplier to drop prices, it needs to take into account how that pressure might affect relationships with the partner in other markets, and what consequences that use of power might have.
This paper looks at three different types of market power: granting incentives (reward power), threatening punishment (coercion power), and executing judiciary rights ("legal legitimate" power). The authors say that understanding the multimarket relationships between buyers and sellers can help companies decide how to more effectively use those powers in a particular market. They also discuss how buyers and suppliers use their power differently. For example, the researchers found that the more contact there is between a seller and buyer, the more likely a supplier is to use legal legitimate power; buyers, on the other hand, would be more likely to use reward power.
Supply Chain Quarterly Senior Editor Susan K. Lacefield asked Dr. Felix Reimann, the lead author, about how companies could use these findings to improve relationships with their supply chain partners.
What was the impetus for your research?
When speaking with chief procurement officers from various industries and companies of various sizes, we noticed a large variation in regard to the internal coordination of their contacts with suppliers. Some firms have a very clear picture of all their business relationships with individual firms, while others basically treat each contract in complete isolation. We were curious about the reasons for that and the effects it might have.
Common sense suggests that when taking the complete picture into account, this should influence firms' decisions on how to treat their suppliers. For instance, you might be the stronger party in one exchange, but another business unit of your company might be heavily dependent on the same supplier. Do you really want to squeeze the last drop out of this supplier, or would you want to safeguard the relationship instead? Those were the ideas we wanted to explore.
We investigated how decision makers change their use of power if they know about other business relationships between their own firm and the supplier. This means that in reality, firms will show the described behavior if they are well coordinated internally, and if they also believe that the other party has sufficient internal coordination to retaliate if they see fit.
Can you define "mediated power" and provide examples of the three types discussed in the paper?
There are two broad kinds of power that can influence a relationship: Mediated and non-mediated. Non-mediated power exists because one party has some form of respect for the other party. For example, if we see someone as an expert in a given subject, we are more likely to follow her or his advice. Through this mechanism, the expert would have non-mediated power over us.
Mediated power, on the other hand, refers to power that one party can consciously use by setting extrinsic motivations such as promising rewards, coercing by threatening punishment, or relying on legal provisions such as contract clauses. In supply chain relationships, a buyer could use reward power, for example, by promising to increase purchasing volumes if the supplier agrees to invest in joint research and development projects. Coercive power could be wielded by threatening to reduce volumes or re-source the volume through e-auctions, where high price pressure can be expected. Legal power would mean to insist on a highly detailed contract and threaten immediate legal action if the supplier deviates.
Why do suppliers and buyers use power differently?
This is a question that research is just starting to understand. Traditionally, business relationships have been assumed to be symmetrical, with buyers and suppliers behaving the same way if they are in the same situation. Recent empirical results, however, have called this assumption into question, and our work is among the first to explore the reasons behind differences in behavior.
We propose that buyers and suppliers interpret multimarket contact in different ways. Suppliers might see it more as a successful lock-in of the buying firm and become bolder in their demands. The buying firm, on the other hand, might feel increasing dependence and supply risk. If the supplier defaults, it will send large shock waves into the buying firm's operations. The buying firm might thus become more cautious in putting pressure on the supplier and be more concerned about the stability of the relationship. Our findings are consistent with these thoughts, but as I said, we are just beginning to understand these mechanics.
We have launched additional research to look deeper into the differences in behavior between buyers and suppliers, and we invite your readers to share their thoughts, experiences, and examples on this topic with us. Just drop us an e-mail! (Editor's note: Readers who are interested can contact Dr. Reimann at firstname.lastname@example.org.)
Your research relied on "vignette methodology" that asked participants to respond to hypothetical circumstances. Tell us about one of the vignettes you used.
The big advantage of this method is that respondents actually make a decision inside the context of the vignette scenario. By slightly varying the scenario among participants, we can find out how these variations influence decision making.
In our research, for example, we varied the degree of multimarket contact. Some participants received a scenario description that included the following: "In addition to the supply relationship you are responsible for, your company and the supplier have established another buyer-supplier relationship among their other business units." This corresponds to relatively limited multimarket contact. Another group of participants received the following description: "In addition to the supply relationship you are responsible for, your firm and the supplier, the SELR Group, have established several buyer-supplier relationships among their other business units. You know of four other business units that also have established buyer-supplier relationships with the SELR Group." So this corresponds to a higher number of multimarket contacts, and in fact we found that participants decided differently on their power use depending on which of the two scenarios they received.
How can supply chain executives apply your findings about power and multimarket contact?
The key implication is that you want to be fully aware of all the exchanges you have with each of your suppliers. That is, you need to be very well coordinated internally. You also want to be very controlled in how you display this coordination in negotiations, because sometimes it can be better to show that you are aware of the entire relationship and sometimes better to pretend that you are only interested in this single contract. Further, you want to get a good sense of how coordinated the other party is, and whether they actually have transparency.
How do you improve internal coordination? Like in every change effort, it is important to have top management on board. In sourcing committee meetings, top management should regularly question sourcing decisions and ensure that all relationships with the supplier are taken into account. Further, incentives for coordination need to be aligned. If a purchasing manager's bonus only depends on her own cost savings, there is little chance that she will spend much time talking to purchasing colleagues in other divisions or category groups. Integrated IT systems can be another huge enabler, and many firms are already working on improving purchasing transparency in their systems.
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