The influence of a power distribution in a business to business context on trade credit

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The influence of a power distribution in a

business to business context on trade credit

Master thesis

By

Christiaan Hobma University of Groningen Faculty of Economic and Business

Master Business Administration, specialization Organisational Management Control August, 2012

Laan van Meerdervoort 160 IV 2517 BG Den Haag

06 25173249 c.hobma@student.rug.nl Studentnumber: 1550276 Supervisor: Willem-Jan van Elsacker

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Preface

June 2011, the moment I started my master thesis. The proposal was finished and the real work would begin. After a first appointment with my thesis supervisor, even the set-up of the proposal was doubtful. Now, a year later, and with this thesis almost finished, it is time for a review of this project and my study as a whole.

In 2005 I started my bachelor Business. A choice that was based on the vague idea to once become a manager. An ambition that was created by the few jobs I had as a scholar. Because becoming a big boss was not a study direction in the Bussines Administration curriculum, control aspects became interesting. Now, august 2012, things are different.

Completing this thesis was one of the most valuable learning experiences during my study. A process that has cost more than a year, with many disappointments and drawbacks. But after all, the product that is now delivered, is a thesis that I can present with pride.

The choice for the subject of the thesis, the influence of power on trade credit, reflect two concepts in my seven years of study that were the most appealing to me. On the one side, power as a

behavioral construct that reflects interaction between people or companies. On the other side, trade credit, a left side balance sheet, working capital related, financial construct. That force field, where behavioral situations and human interaction, have an impact on financial performance, that is the point that fascinated me most in my master Organisational Management Control.

During the writing of my thesis, many hard and difficult moments arose. Here, I first want to thank my supervisor of this project, Willem-Jan van Elsacker. Many appointments and meetings during my thesis have led to inspiration, the will to continue and guidelines for the reach of this end product. After many meetings, sitting in my car back to Groningen, considering the feedback, a renewed inspiration for the completing of this thesis arose. The feedback was sometimes abstract, but during meetings the level of academic thinking was higher than ever before.

Here I also want to thank my girlfriend, Janneke Andringa. She was a solid point in this sometimes ocean of despair. Evening after evening, the frustrations about the evolvement of this thesis were countered with a ceaseless optimism. This is combination with a pressure to continue have made me come to this finishing point.

I want to thank my parents for the facilitating of my study, the help they gave on the so many aspects of live. My brother, for the anger and reprimand of not finishing in time during the weekend in Milan when the final last parts had to be done.

And now, after completing this project, endless possibilities arise. In September, I will start as s financial trainee at PostNL. A new step in live, with many new chances of development. A academic career will end, a professional career will begin.

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Abstract

This master thesis consists of a research for the interaction between power differences, trade credit terms and supplier opportunism. This is done in a case study at Jumbo Maripaan, the largest Jumbo supermarket franchise in Holland. Data is acquired by interviews and a complementary survey. This thesis is a qualitative research, that uses pattern matching as a research method. Three expected theoretical patterns are compared with the findings in the case company. This thesis finds that high supplier power relates to a low level of attractiveness of trade credit terms for a buyer. Also a low level of supplier power relates to a high level of attractiveness of trade credit for a buyer. Based on the findings in this thesis no relation is found between supplier power and opportunism.

Keywords: Power, dependency, trade credit, opportunism Supervisor: Willem-Jan van Elsacker

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5 4.6 Supplier selection ... 37 5. Results ... 39 5.1 Team Zes ... 39 5.2 Shannon Meats ... 41 5.3 Smit Fish ... 43 5.4 Gigi ... 45 5.5 Weidenaar ... 47 5.6 Zaaister ... 48 5.7 Le Poole ... 50 5.8 Sweet Paradise ... 52 6. Analysis ... 55 6.1 Hypothesis 1 ... 55 6.2 Hypothesis 2 ... 58 6.3 Hypothesis 3 ... 60 7. Conclusion ... 62 8. Managerial implications ... 64

9. Limitations of the research ... 65

10. References ... 66

Appendix 1: Dependency survey ... 70

Appendix 2: Guideline interview ... 74

Appendix 3: Ratings on concepts ... 76

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1. Introduction

In the beginning there were two companies interacting with each other. This is in many business situations the underlying start of a problem or case. Exchange is central in the interaction between companies for four reasons. Exchange serves as a focal event between two or more parties, it provides a frame for identifying social networks and execution, gives the opportunity to investigate the domain of objects that get transferred, and finally it allows the study of conditions and processes for the buyer seller exchange (Dwyer et al. 1987).

In the buyer supplier exchange many dynamics play a role, in the words of Anderson and Narus (1990): The interaction between buyer and supplier involves all aspects that human interaction can have. Where this is one of the broadest definitions of the constructs that are covered in the buyer supplier relationship, this thesis will focus on the power aspect. To illustrate the significance of this part of the interaction Krapfel et al.(1991) states: Power remains a core construct in assessing inter-organizational relations.

Power in a business to business context has its implications on daily live. A well-known example from 2009 has been the Aholds boycott of all Vrumona products. Due to a conflict about the price setting, Ahold refused to sell any products of its supplier Vrumona until they lowered their prices. Over the last five years Ahold has had comparable conflicts with several suppliers ranging from Grolsch to Peijnenburg. Although this conflict starts in a buyer supplier setting, end consumers notice it almost instantly. For the analysis of the example above, power is a central construct, that demonstrates the relevance of the statement of Krapfel et al. (1991).

In this thesis, the other central concept is trade credit. This financial concept that a supplier can offer to the buyer of its product or service is elaborated in the Master Organisational Management Control at the University of Groningen. During the courses of Wim Westerman for Advanced Financial

Management, and especially Working Capital Management, trade credit is given extensive attention. Trade credit is the largest source of working capital in the United States (Berlin, 2003). Where this financial concept involves both the supplier who can offer it and the buyer that possibly can make use of it, it is of great relevance in the business to business environment.

The central topic in this thesis will be the influence of the power distribution on the trade credit that is offered. The research question aligned to this is:

What is the influence of a power distribution in a business to business context on trade credit? To add to a fuller understanding of this interaction, the concept of opportunism will be used in this research. Opportunism, as “self-interest seeking with guile” (Williamson, 1975) is a behavioral construct that when expressed in the context of this thesis, withdraws value of the relationship for the advantage of the supplier.

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7 The research in this thesis will be done as a case study at Jumbo Maripaan. Jumbo Maripaan is the largest Jumbo franchise formula in the Netherlands. The organization operates supermarket

locations in the northern region of the Netherlands and has more than one thousand employees and weekly revenues exceeding two million euro’s. In this setting the differentiation among suppliers is enormous, ranging from daily mass volume lorries to suppliers that deliver once every four weeks. To gain understanding of the interaction between the concepts, interviews are held with several

department managers and the controller of this organization.

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2. Theoretical Section

2.1 Theoretical foundation, resource dependency theory

Before an overview of the existing literature can be given, a view of the theoretical foundation is essential. In the existing business literature several foundations can be found, for this thesis the resource dependency theory is most appropriate.

Resource dependency theory originates in the idea that resources, held or wanted by the company are the driving force behind the behavior of a company. It is an organizational theory, that tries to characterize the behavior of the company. This theoretical foundation is made well known by the publication of Pfeffer and Salancik (1978). Every company is looking for resources that are scarce. Holding valuable resources will result in a powerful position towards another actor that is interested in that resource. A company depends on several different resources, personnel, raw product and for example financial resources, so the scarcity of resources makes that companies have to choose between options. Holding a powerful position results from having others depend on resources held by the company. For a company, critical resources are those resources that are essential to the functioning of the company, without critical resources a company can-not function. This view has implications on many parts of the strategy for a company. The acquiring and holding of resources is essential for the dependencies a company will have.

Where resource dependency theory tries to characterize behavior in organizations, other organizational behavior theories can also be chosen. A broadly used institutional theory is the transaction cost theory. The beginning of this theory lies in the work of Commons (1934) when he took the transaction as the basis of economic analysis. Transaction cost economics is widely known through the publication of Williamson (1981). He states that the transaction costs idea can be applied to human behavior and that this can explain organizational behavior. Transaction costs occur when people interact with each other, and the frequency, opportunistic behavior, specificity,

uncertainty and limited rationality are determinants for the transaction cost associated with the behavior. Based on these determinants, companies and industries will function as a market or as a hierarchy. These two extremes are based on the situation where transaction costs are so high, that outside acquisition of products or services is necessary or the situation that everything is produced in-house.

This thesis will use the resource dependency theory as its theoretical foundation for several reasons. In the first place it matches with the concept of power that is object of study. Where other

institutional theories are also applicable, resource dependency theory has a direct link towards power. Resources held by the company lead to a power basis during interaction with others. Scarcity of critical resources, or hardly accessible critical resources, lead to a dependence upon another entity that holds this critical resource. In resource dependency theory, this is one of the building blocks, and this makes this theory the best theoretical foundation for this thesis.

Besides that, many of the research that is used in the literature overview is also grounded in the resource dependency theory. This makes the choice for this foundation congruent with previous research. Within the selection of research that is referenced, attention will be given to the

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2.2 Perspective in the business to business relationship

Where two companies interact, both companies experience the interaction for themselves. This can lead to differing perceptions of many aspects of the relationship between the buyer and supplier (Ambrose, Marshall and Lynch 2010).

In this thesis, the central actor is the Jumbo Maripaan and power dynamics are studied towards suppliers. This makes that this thesis is written from a buyer perspective. A view from the perspective of both the buyer and the supplier would make the data dyadic. Absence of dyadic information in previous research is mentioned as a limitation of such research. Though the great majority of research on supply chain interaction is from a one-sided perspective. Reasons for this lie in the fact that two sided information is costly and time consuming to acquire. Besides that, when both buyer and supplier give information about essential parts of their collaboration, this is highly competitive information. Most companies are not willing to cooperate in such research.

To counteract this possible limitation of the thesis, the central actor is asked to give his view on both his own position as well as the position of the supplier in the survey that supports the interviews. This adds to the robustness of the data and is further elaborated in the methodological section.

2.3 Unit of observation, the supplier

After handling the perspective, the unit of observation needs attention. When the influence of a power distribution is studied in a business to business context, two actors are important, buyer and supplier. The buyer, the central actor, will be handled extensively in the case description, after this, an overview of literature concerning suppliers in a supply chain will be given. This supplier typology is based on a buyer perspective.

The statement above, a literature overview concerning the supply base of a company, is very general and gives little handhelds where to focus. By looking at the research question, this focus can be found. In the research question the influence of a power distribution is central. When the supplier and power are studied, an assessment of possible supplier relations is useful. This gives an overview of the types of suppliers that a buying company can face. The following paragraph will deep further in the determinants of a power distribution, in this paragraph a typology of possible suppliers for a buying company will be given.

2.3.1 Supplier typology

Supplier relations and the segmentation of suppliers in groups get most attention from the field of operational management, where purchase management has evolved from a focus on the lowest buying price towards purchase relationship management. (Holmen ea.2007) This thesis has a focus on the power dimension and in that, an assessment from the purchase field of the types of suppliers that a buyer comes across in every day operations is valuable.

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10 Non critical items: These are items that have a low supply risk and a low impact on profits for the company. It is further characterized as a product with a high standardization and an good market overview.

Leverage items: These items have a low supply risk, but a high impact on the profit of the buyer. Vendors can be selected, and products can be substituted if the buyer prefers this.

Bottleneck items: Here the supply risk is high, but the impact on the profit for the buyer is low. Control is in the hands of the vendor and buyers make backup plans for this category.

Strategic items: In this category, both the impact and the risk are high. Here, risk analysis and the development of long term supply relationships are important.

For this thesis the power dimension is central, and this power resides partly in the product a supplier offers. In this sense the work of Gelderman and Van Weele (2003) gives insights on possible supplier typologies. They base their research on the original model of Kraljic (1983) . This comes forward in the strategic directions that lead from the present position of this supplier.

On the one hand this framework a strong buyer perspective, suppliers and their products are

assessed from the viewpoint of a buyer. On the other hand, the proposed strategical directions show the sources of a power distribution where a focus will lie on in the next paragraph.

2.3.2 Strategic directions based on supplier typology

Non critical items:

In the relationship with a supplier in this category, a focus for the company should be on the pooling of requirements. Non critical products are of low risk and also of low impact on the profit of the buying company. Pooling of requirements can be done by the ordering in large quantities and therefore retain purchase discounts. If this category is moved, it moves towards the leverage segment, where financial impact is bigger. From a relational perspective, a focus should be on the quantity and bundling of purchase.

Bottleneck Items:

For these supply items risk is high and financial impact is low. Gelderman and Van Weele (2003) suggest that other options should be looked at. This can be done by broadening the specifications, so that more suppliers can fulfill the requirements. This is movement towards the non-critical segment. In the case that this is not possible, the assurance and quality of the product are critical. The

enlargement of the stock inside the buying company lowers supply risk.

Leverage Items:

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Strategic Items:

Suppliers in this segment are both risky and financially important. The preferred movement would be towards a leverage supplier. This can be done by the same action as for bottleneck items. When a company chooses to hold a position in this segment a long term relationship can be developed. This is done when a supplier contributes to the competitive advantage of the buyer. The development of a long term relationship can also be a locked-in choice, when a patent, monopoly or high switching costs make it difficult to change to another segment.

Figure 1: Purchasing strategies

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2.4 Supplier Relationships and the power dimension

Now there is some insight in the segmentation amongst the supply base of the company, the distribution of power in the interaction between supplier and buyer is needed. This is done by first get a deeper understanding of the concept of power, and after that the determinants of power will be handled. Several ways of using power and the results of that use will be discussed.

In recent years the body of research concerning power in supply chains has significantly increased. From a marketing as well as a purchasing perspective business to business relationships are

examined. The factor of power in these relationship has generated more and more attention (Kumar, 2005). A widely used explanation of power is the one by El-Ansary and Stern (1972), they define power as:

”The ability of one channel member to control the decision variables of another member in a given channel”.

This definition, which is already applicable on supply chain management, where the channel is the supply chain, is derived from sociological research. In sociology power is defined in dependencies between actors. Emerson, a sociologist, states that an actors’ power in an interaction resides in the others’ dependence on the actors’ resources (Emerson, 1962).

In an application to the field of business, this definition is taken up by Pfeffer and Salancik (1978), who apply this theoretical concept and state that ‘Resources create dependencies when they are important or when the control over these resources is relatively concentrated’.

The importance of the resource is then determined on the basis of the magnitude and the criticality of the resource (Pfeffer and Salancik, 1978). The magnitude of a resource is a depiction of the ability to replace the resource for the other actor. The criticality of a resource is defined by a firm’s ability to function without the specific resource (Pfeffer and Salancik, 1978).

The second part of the definition by Pfeffer and Salancik (1978), the concentrated control over recources, can be better understood in the light of the theory of Porter (1980). In a business to business context, control over resources is concentrated, when a company has control over a resource and other competitors do not have this control.

To diagnose this resource control, in the theory of Porter (1980), one must have a look at the level of concentration in the industry where the company is active. When a low amount of competitors generate a large amount of the sales made in this industry, the level of concentration for that industry is high.

When this concept is linked with power, companies in industries with high levels of resource

concentration have bargaining power through the large volumes and the low amount of alternatives (Benton and Maloni, 2005). An example of an industry with high level of resource concentration is the aircraft assembly. In this industry, dependencies are created due to the fact that suppliers are not easily replaced.

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13 are high of a resource, and this resource is placed in a surrounding of a highly concentrated control, the greatest dependencies arise, with the effect of great bargaining power.

An example of such a situation can be found in the case of Mart. Some of the suppliers of Wal-Mart almost exclusively deliver their output to Wal-Wal-Mart (high magnitude). In this case the

concentration of control is high, because Wal-Mart for a large extent controls the general retailing. So that if Wal-Mart stops buying products from that supplier, the supplier will face problems finding other retailer option to compensate for the loss in sales it realized in connection to Wal-Mart. Now there is some clarification about the relation between power and dependency, a further segmentation of the factors that can make this dependency measurable is required.

2.4.1 Dependency on a group level

In previous research a further separation is made between the measuring of the dependencies of groups of suppliers and the dependency on a firm level. Porter (1987) gives a broadly used analysis on the group level, where Krajewski, Wei and Tang (2005) do this analysis on an individual level. The measurability of power for groups of suppliers is found in the work of Porter. In his five forces model, supplier and buyer’s bargaining power are two of the five forces. This model is chosen to make an assessment of dependencies because of its widespread use, by both practitioners and academics.

Porters’ (1980) framework, which can be used for an industry analysis, gives measurable

determinants for the power distribution in an industry. Where this is in the first place an analysis tool for the attractiveness of an industry, this attractiveness is partly based on power distributions in the industry. Both the power of buyers as well as the power of suppliers are in the Five Forces Model. The power of a suppliers group is high when:

 The group is dominated by a few companies and is highly concentrated.  The differentiation of the product is high, it offers a unique product.

 The group is not obliged to contend with other products for sale in the industry  The group has the possibility to integrate forwards.

 The buyer is not an important customer of the supplier group.

Porter (1980) states that the previous mentioned five characteristics determine the bargaining power of a supplier group. A group of suppliers has more bargaining power when the group consists of a few big companies. A great magnitude of the individual companies in the group makes bargaining easier, due to the fact that the group has less participants to take into account. When a group is build up from many small companies, the consequence is that more participants should be reckoned with. When a group supplies a product that is unique to its buyers, the bargaining power of this group will be higher. The uniqueness of a product is measured by the level of differentiation it has in

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14 manufacturing facilities. (As an example, beverage companies hold such ties to the producers of cans for their product.)

In some industries, there are obligations for products to contend with others. Regulations from the European commission can limit conglomerates in their business. The absence of such obligations, or approvals of mergers form a source of great supplier bargaining power.

When a group of suppliers is able to integrate its business forward into the business of the buyer, this leads to greater bargaining power for the supplier. By integrating forward, the supplier becomes part of the business of the buyer. This is perceived as a threat from the point of the buyer, because this will make the supplier a direct competitor. By having the possibility to integrate forward, a supplier group can withhold buyers to improve their purchasing terms.

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2.4.2 Dependency on a firm level

Where Porter (1980) makes an analysis on an industry level, Krajewski, Wei and Tang (2005) look at the power distribution on a firm level. In their research they make an overview of the existing literature on dependencies and take factors of different authors to a combined measure. In their model, the focus is on the measurement of the power of the supplier, where supplier power is high when:

 The number of major customers of the suppliers component is high  Supplier’s market share for the component is high

 Number of actual suppliers of the same component to the buyer is low  Number of potential suppliers for the product is low

 Supplier’s annual revenue attributed to the buyer is low

The first factor is mentioned in the work of El-Ansary and Stern (1972). They build on the definition by Emerson (1962) where power is viewed as a function of dependencies. This dependency for the supplier is lower if for a particular product major other customers are available. More customers for a product will lead to more latitude for the supplier in handling these customers. Therefore a dependency from the customer towards the supplier is created, which results is a higher level of supplier power.

The second determinant comes from the work of Frazier(1983) and Buchanan (1992). A large market share for a component implies that the overall market for this component values the supplier in producing this component. It stems from this high market share that the supplier has a comparative advantage over competitors producing the same component. This collective decision to value the component of the supplier leads to a dependency and therefore an increase in supplier power. The third and fourth determinant relate to each other in the way that it takes in to account the actual or potential suppliers of the product. Heide (1994) reaches this conclusion by referring to the

possibilities that are left for a buyer. If a supplier is one of the few sources through which a buyer can acquire a component, this will lead to a dependency. Following this rationale, determinant four is an additional source of power when determinant three is present.

In the case that a buyer accounts for a small percentage of the total revenue of the supplier, the supplier will have more latitude in dealing with this buyer. Frazier and Rody (1991) split this factor in their research in the present percentage of revenue and the future percentage. It comes forward that if a buyer accounts for a large percentage of the revenue of the supplier, this will create a dependency for the supplier on the buyer. If, on the opposite, the revenue attained from a buyer is low, this will lead to a dependency for the buyer on the supplier.

2.4.3 Comparison between group and firm level

The two models described here try to give measurable determinants of the dependency distribution in a business to business environment. An assessment of the similarities and differences between the two model of Porter (1980) and Krajewski, Wei and Tang (2005) will lead towards a set of factors that will be used in the research section of this thesis.

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16 with Krajewski’s factor of big market share for the supplier (Number 2 of the factors, referred to as K2). When the concentration in a supplier group is high, there will be several big suppliers, this implies that for the individual company to have a greater dependency overweight, it needs a big market share. This is exactly the rationale behind the second factor in the model of Krajewski. The second factor of Porter, the differentiation and the uniqueness of the product corresponds with the third and fourth factor of Krajewski. Here, the low number of actual or potential suppliers, implies that the product that is offered, is unique to the extent that it is hard for potential

competitors of the supplier to also supply this product. A high differentiation of the product leads to few actual or potential other suppliers for the product, so P2 relates to K3 and K4.

The last factor of Porter, the buyer is not an important customer to the group of suppliers, is related to the first and the last factor of Krajewski. Krajewski states that a dependency is created if a supplier has many other customers for a product (first factor of Krajewski). Besides this, when the revenue from a buyer is low, this is a concrete measure to indicate the importance of this buyer. In that sense the last factor of Krajewski can be seen as an operating measure of the importance that Porter mentions as his first factor.

This leaves two factors of Porter that are not covered by the factors of Krajewski. The possibility to integrate forward and the absence of obligations to contend. These two factors have a basis in the group level of Porters’ research. For an individual supplier, the possibility to integrate forward could add value for that company itself, but in the interaction with the buyer this is less relevant. When groups of suppliers can take over a phase in the supply chain, this will affect buyers, when an individual supplier has this possibility the impact will be much smaller.

The absence of obligations to contend is relevant when groups of suppliers are compared with other groups. Less obligations make the group more powerful then groups with more obligations. But on an individual level, these obligations in a certain line of business are a qualifying factor for doing business. In this respect, an individual supplier makes no difference in comparison to another supplier in the same line of business.

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2.5 Trade Credit

Trade credit as an important source of short term finance for most companies is well recognized (Pike et al. 2005) Use of trade credit, reduces the capital investments required to operate the business. In this sense trade credit is the largest source of working capital in business to business firms in the United States (Berlin, 2003). Trade credit sales represent almost 18.5% of sales for large US firms and 30 percent of these firms indicate that their clients rely on trade credit for routine financing. (Ng et al., 1999)

As comes forward, trade credit is an important financial tool in the business to business

environment. In this paragraph of the thesis, first a definition of the concept is elaborated. After that a literature overview of the determinants of trade credit is given. Here a link between the power concept and trade credit is sought in the literature. Close to the determinants are the purposes for both the buyer and the supplier in extending trade credit. The attractiveness of trade credit is looked at in this section. In conclusion, a link between trade credit and the supply chain in the sense of the extension of the EOQ model is given.

Before a deeper look at the concept of trade credit can be taken, an extensive definition of the concept has to be formulated. Most generally, trade credit is referred to as a “Seller’s short-term loan to the buyer, allowing the buyer to delay payment of an invoice” (Lee and Rhee, 2011). Berlin (2003) goes further in this and defines two types of trade credit, one with a net-term policy and one with a two-part term policy. For a net-term construction, the terms are formulated as for example: net 30 days. This indicates that the seller allows the buyer to delay payment until 30 days after the date of the invoice or the date of delivery.

A two-part term, which is also referred to as a cash discount policy, is a more complex form of trade credit. Here the three clauses are: The discount percentage, the discount period and the net date. This is mentioned on an invoice as: 2/10 net 30 days. In this form, the buyer is offered a 2 percent discount if the payment is received by the seller within 10 days after the date of the invoice. Just as in net-terms, the 30 defines the ultimate day on which the payment has to be made.

By using this construction, the seller offers the buyer besides delayed payment also a discount. This discount can also be seen as an opportunity cost for the buyer if he forgoes the 10 day period. By not paying, before the tenth day, the buyer gets 20 days of extra credit, at the cost of a lost 2 percent discount. The costs associated with this lost discount are referred to as the implicit rate in the trade credit. This implicit rate is calculated as:

(Formula comes from Ng, Smith and Smith,1999) In the example above, the implicit rate is 43.86 percent. (100/98)^(360/30-10)-1= 0.4386.

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18 A higher discount percentage, and a net date closer to the end of the discount period make the implicit rate higher. These dynamics in the contract are central in the judgment of the attractiveness of the contract for the buyer.

The several options for the moment of payment, are shown in the figure 2. This figure describes the possible inter-firm credit arrangements.

Figure 2:( From NG, Smith and Smith 1999)

2.5.1 Determinants of Trade Credit

After the defining of the concept of trade credit, a further theoretical examination of the grounds for use of this concept have to be given. This will first be done from a financial perspective, to ground this financial concept in financial theory. After that a more behavioral approach will be used. With regard to the relevance for this thesis, an emphasis will be put on dependencies that can be a determinant in this behavioral approach.

2.5.1.1 Financial determinants of trade credit

When trade credit is placed in a financial perspective, most theoretical approaches search for advantages that exist for sellers to grant credit to a buyer. Trade credit is seen as an alternative financing possibility for both the buyer and the seller, in comparison to for example bank financing. Theories focus on the grounds that can exist to explain this advantage over “normal” bank financing. In this field, Schwartz (1974) has made a first exploration of these advantages for suppliers over banks to grant credit to a buyer. A first advantage for a supplier compared to a bank lies in the acquisition of information.

A supplier very directly notions the size and timing of orders, in two-part term trade credit

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19 Banks can also collect similar information, but not as quick and for low costs, where this information is directly available for sellers. (Petersen and Rajan, 1997)

By having more information available in comparison to a bank, it is more attractive for a supplier to grant credit. As an example, a seller can directly notice the use by a buyer of discounts in a two-part term trade credit. This can be interpreted as a signal that the buyer is financially healthy.

Another advantage for sellers to offer trade credit to buyers is related to the “finance advantage theory” of Schwartz (1974). The rationale behind this theory assumes a large seller and a relatively small buyer. Where large volume companies have easy access to financial markets, this is harder for small volume companies. This leads to the possibility to “sell” the monetary resources that large sellers possess to firms which are more limited in their possibilities to obtain funds. Trade credit in this sense is a way to finance smaller companies. The large seller pays a market rate for its own funding, and can use this rate as the basis of its trade credit terms for the smaller buyer of its products or services. On this basis, there is an advantage for both the seller and the buyer to use trade credit.

A third reason that makes trade credit attractive for a seller compared to a bank is the possibility to price discriminate, charging different prices for the same product or service. When a company sells something, mostly the price does not differ for different customers. Though it might be attractive to do so for a seller, due to extra risk associated with some of its clientele. In setting different terms for the trade credit offered, the seller has the possibility to price discriminate. Brennan (1988) describes the advantages for sellers to price discriminate with the use of trade credit. Price discrimination is legally restricted, but Brennan gives examples to circumvent price discrimination regulations through the use of trade credit. Even when a firm should be prohibited to set different terms, there is still the screening effect of trade credit. Equal terms will be more attractive to financially constrained firms, through their bad access to other financing options, as described above. So even when price discrimination is difficult, the information advantage makes trade credit more attractive over bank financing.

2.5.1.2 Non-financial determinants of Trade Credit

As there are financial determinants, also non-financial reasons for the use of trade credit are available. Product quality assessment is one of the reasons to extend trade credit. Trade credit as a short term loan for the buyer always covers an invoice. When this invoice consists of tangible goods, a seller can be legally permitted to seize these goods if payment is not received on the net date (Mian and Smith, 1992). By not demanding cash on delivery, a buyer can assess the quality of the purchased goods, before he makes the payment. In this sense trade credit can be used as a quality guarantee (Ng, Smith and Smith, 1999)

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20 then states, that attractive trade credit terms can be used to give temporarily assistance to buyers, in which the sellers has invested.

A third reason to extend trade credit by a seller is related to the sales volume and operational perspective of the buyer. Delaying payment by the receipt of credit, enables the buyer to increase the order quantity, due to the time value of money. (Lee and Rhee, 2011) From an operational perspective, the order quantity determines many aspects of the operational process. The EOQ formula from Harris (1913) is widespread in operational functions. This formula minimizes both the inventory holding costs and the ordering costs. Trade credit is of significant influence on this order quantity. (Rachamadugu, 1989) He finds that the optimal order quantity increases if delay in

payment is permitted. Therefore it is attractive to a supplier to offer trade credit to the buyer. From the suppliers view this is a sales related argument, for the buyer trade credit increases operational efficiency.

The above literature overview is summarized in table 1:

Financial

Non-Financial

* Supplier has information advantage over institutional lender

* Gives the opportunity to assess the quality of products

* Large supplier has better access to financial markets

* Based on relation, supplier has incentive to hold the buyer in business

* Trade Credit offers possibility to price discriminate

* For the supplier sales extension, for the buyer EOQ optimization

Table1: Financial and non-financial determinants of trade credit

2.6 Power and Trade credit

Now there is insight in the determinants of trade credit, the link with the concept of power is

essential. In the literature, the direct influence of dependencies on the concept of trade credit, is not much investigated. A study of Wilner (2000) develops a theoretical approach for dependent firms in their pricing, lending and renegotiation strategies. Where trade credit is associated with lending, this study is relevant for this thesis.

Wilner (2000) investigates companies that are in financial distress and the dependency of the buyer on the supplier is modeled on the basis of a possible bankruptcy of the buyer. Wilner concludes, that if a buyer is more dependent (i.e. bankruptcy is more likely to declared) a buyer will make more concessions to the supplier. These concessions are of non-financial character. The interest rate, the price of the trade credit, rises as bankruptcy becomes more feasible. Concessions are made by the buyer to lower the price of trade credit. As a general conclusion, Wilner (2000) states that with greater dependencies of the buyer, the costs of trade credit will rise.

Where Wilner (2000) takes bankruptcy as a proxy for dependency, in the previous theoretical section, another set of determinants was developed. This set was made on a firm level and a group level. The determinants to create a dependency will now be compared with the determinants of trade credit. By this comparison, more insight will be generated for the research section.

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set-21 up of the research will be further discussed, but here the determinants of both concepts will be compared. This is done to give a more extensive understanding of variables that could be determinants of both concepts, and therefore should be paid extra attention to.

When the factors of Krajewski (2005) are compared to the determinants of trade credit, the first thing that attracts attention is the factor of volume. In the work of Krajewski (2005) this factor is mentioned as a determinant of a dependency.

Krajewski (2005) states that a dependency for the buyer is created when the supplier’s market share for a product is high. A high market share will only be present if the volume of the supplier is (at least relatively) high. Volume, by Krajewski (2005), in this sense is a high volume in sales in the market for the suppliers product.

This large volume of a supplier, is also found in the financial determinants of trade credit. The finance advantage theory of Schwartz (1974), states that because large suppliers have easier access to financial markets, it becomes more attractive to offer trade credit. This indicates that large supplier volume is a factor that makes trade credit more attractive to be offered and also makes the supplier more powerful. In this sense, volume is a factor that, based on the literature, influences both concepts. Volume as a confounding factor should be paid attention to in the methodology section of this research.

Besides this factor that influences both concepts, other contrasting factors can be found in both series of factors. Krajewski (2005) states that a buyer is more dependent on a supplier, when the number of major customers of the suppliers product is high. This makes the buyer easily substituted. Krajewski (2005) uses this logic to indicate that a buyer is more dependent if the supplier can easily switch to another buyer.

This conflicts with the non-financial determinant of trade credit that a sellers has an incentive to keep the buyer in business. Smith (1987) argues that a seller will extend attractive trade credit to a buyer based on relation specific investments. These investments are the incentive to extend attractive trade credit and therefore help the buyer to stay in business. If this goal is reached, the seller has the opportunity to earn back the investment, where this is impossible in the case of bankruptcy.

The conflict then lays in the fact that a seller on the one hand has an incentive to keep the buyer in business and on the other hand has a power advantage if the buyer is easily substituted. Therefore substitution creates a dependency but may not be optimal if a trade credit decision is considered. The concepts of volume and substitutability will therefore receive extra attention in the methodology section.

2.7 Expected influence between supplier power and trade credit.

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22 Based on the definition of power from El-Ansary and Stern (1972) power is:

”The ability of one channel member to control the decision variables of another member in a given channel”.

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2.8 Opportunism

So far, there has been an overview of the existing literature of both the bases of power and the determinants that provide a buyer or supplier with a dependency advantage and therefore a power position. These two views on power are most analytic and where power is studied in a business context, the application and the use of power is important. Therefore, in this paragraph, the utilization of power is studied.

In our capitalistic society, the axiom of selfish and individualistic behavior is a central concept. (Hofstede 1991). Firms try to reach comparative advantage over others, and in the struggle to reach this, aggressive behavior and opportunism towards others can be used. Williamson (1975) defines opportunism as “self-interest seeking with guile”. This includes aggressive selfish behavior in which the negative impact of actions on others is hardly taken into account.

Where opportunism can arise in any interaction between actors, the facilitating factors and the impact of this behavior in a supplier setting is relevant for this thesis. To find this buyer-supplier focus, marketing literature is most valuable. Next the circumstances that facilitate or antecedents towards opportunistic behavior are studied.

2.8.1 Facilitators of opportunism

From a supply chain perspective, three facilitating antecedents for opportunistic behavior can be found in the literature. Formalization, relational norms, dependence and uncertainty can lead to opportunistic behavior.

First, several researchers have found relationships between formalization and opportunistic

behavior. Formalization in a business to business context is high when contracts are formal, authority is centralized and operating processes are strictly described. Formalization leads to more explicit ways of interaction and through these explicit “rules” few possibilities are left to act opportunistic. In this way, formalization leads to a decrease in opportunistic behavior.

Second, relational norms are “expectations about behavior that are at least partially shared in the exchange relationship between firms”(Heide and John, 1992). In this definition the word shared is central, a norm is only a relational norm, if it is shared by both parties engaging in the relationship. Solidarity, flexibility and harmonization of conflict are examples of relational norms. (Grundlach et al, 1995). In this research Grundlach et al. (1995) find that in relations where relational norms are dominantly present opportunism is reduced. This finding, that relational norms reduce opportunism is supported by research from academics. (Brown et. al, 2000 and Joshi and Stump, 1999)

As third, and for this thesis very interesting, facilitator of opportunism dependence and uncertainty is mentioned in the literature. Dependence has been mentioned in the previous paragraph extensively, as an indication of the power dimension in a relationship. Several researchers found a relationship between dependence and opportunism (Heide and Wathne, 2000 and Joshi and Arnold, 1997). In the relationship between dependence and opportunism, relation specific investments are important. Relation specific investments are those costs that a buyer or a supplier has made that are only valuable in the relation with that specific counter party.

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24 member that has under-invested in comparison to the other member exposes a tendency to behave more opportunistic. (Rokkan et. al 2003) The opposite is also found, the member that has invested more, behaves less opportunistic. The mechanism behind this tendency is described as a “lock in”. When a buyer or a supplier makes an investment that can only be used in the interaction with one specific counter party, “he locks himself in”. This lock is due to the non-transferability of the investment.

2.8.2 Impact of opportunism

After getting a view of the facilitators, the impact of opportunism is relevant. In this thesis the influence of a power dimension on trade credit is studied. So far we have seen that dependence can be a facilitator of opportunism, now the impact of this opportunism needs attention. When

discussing this impact, the combined impact on both buyer and supplier is considered, not only the harm or benefit of the (non)opportunistic actor.

Just as for the facilitators, the implications of opportunism are studied from a business to business perspective. Marketing literature is especially focused on this impact, so most of the references come from that perspective.

A first effect of opportunism that is studied, is the effect on the performance in the interaction. Nunlee (2005) finds that when one actor behaves opportunistic this has a negative influence on the performance of the whole interaction. In this, performance is operationalized as the combined profit, so opportunistic behavior from one actor leads to a decrease in the combined profit that both parties make in the interaction.

Closely related to the performance in a buyer-supplier relation lies the costs in the relation. These cost under opportunistic behavior of one of the actors is researched by Dahlstrom and Nygaard (1999). They find that when one actor behaves opportunistic, an increase in costs compared to non-opportunistic behaviour of both actors is present. Costs associated with opportunism are divided in three categories.

Bargaining costs are the costs that come from renegotiating the original contract. When the supplier acts opportunistic, he will react in a self-interest seeking way on any new unforeseen circumstances. Renegotiation and bargaining entails costs. Adjacent to this, monitoring costs will be higher under opportunistic behavior. An actor that faces an opportunistic counterparty, will have to monitor the behavior of its dyadic member in order to prevent possible negative impact of the opportunistic behavior.

Maladoption costs are the last category, and are related to communication and coordination failures. Opportunistic actors act with self interest, and when communication and coordination is costly for an actor, an opportunistic party can reduce communication costs. As a consequence maladoption costs arise for the other party.

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2.9 Expected influence of opportunism

After the preliminary view in paragraph 2.7 on the central question of this thesis, the influence of opportunism in a same preliminary context can be formulated. In this first a view will be constructed for the influence of supplier power on opportunism, after that the influence of opportunism on trade credit terms will be looked at.

As depicted in paragraph 2.7, a supplier that holds a high level of supplier power is able to control the decision variables for the other channel members. When this definition is used to look at the influence on the concept of opportunism, a supplier with a high level of supplier power is able to control decisions in a way that is most attractive for himself. Opportunism is “self-interest seeking with guile” (Williamson, 1975), and includes selfish behavior. Hofstede (1991) states that in a capitalistic society, selfish and individualistic behavior is the axiom. Based on this precept, a supplier that holds a high level of supplier power will try to reap benefits from the relation with the buyer. In this, high supplier power will correspond with a higher level of opportunism from the side of that supplier.

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3. Conceptual model

After the theoretical section, the three central concepts in this thesis, Power, opportunism and trade credit have been funded in the existing literature. In this part, the central question and the

interaction between the concepts will be elaborated. Much knowledge exists about these concepts, but the interaction between them has been unexplored. This adds to the explorative character of this research. Especially this interaction between the concepts, is where the focus of this research lies. In the theoretical section, preliminary expectations based on the literature are formulated. These expectations are used as a starting point for the hypotheses.

The central question of this research has been formulated as:

What is the influence of a power distribution in a business to business context on trade credit?

To answer this question, the three concepts of power, opportunism and trade credit have been given much attention. Where this research is explorative, the hypothesis for the interaction between the concepts are indications, not fully grounded in existing knowledge.

Hypothesis 1: A power advantage for the supplier corresponds with less attractive trade credit for the buying firm.

This hypothesis is formulated based on the expectations from paragraph 2.7. In this valuation, the supplier with a power advantage will be less willing to extend trade credit that is favorable for the buying firm. This hypothesis also indicates the opposite that if a buyer is more powerful, he will receive more attractive trade credit due to this power advantage.

Hypothesis 2: A power advantage for the supplier corresponds with opportunistic behaviour by that supplier

This hypothesis is formulated based on the expectation in paragraph 2.9. A supplier with a power advantage has more freedom to handle in a way he prefers. Based on the idea that every economic actor will try to maximize value for himself, this actor will choose for profitable actions for himself. Actions that are profitable for the actor himself are a depiction of opportunistic behavior.

Hypothesis 3: Opportunism from the supplier corresponds with less attractive trade credit for the buying firm.

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27 As mentioned in the methodology, this research has a buyer perspective where all the data is

gathered at the buying firm. This implies that opportunistic behavior is measured for the side of the supplier, the possible opportunistic behavior of the buyer itself is not taken in account. For trade credit it is straightforward, only the trade credit that is offered by the supplier is taken in account. For the power concept, from the perspective of a buyer, supplier power is most relevant. The three hypotheses and the interaction between the concepts are depicted in figure 3, that shows the conceptual model.

Figure 3: Conceptual model

As comes forward in the hypotheses, the relation between the concepts will be tested. In the formulation of the hypothesis, leading from one concept to another seems to indicate a causality. In the research, all the concepts will be classified on the basis of measures that are given in the

methodology section. This will generate scores and classifications for all three concepts. These scores are then compared to each other in the analysis chapter. The purpose of the research is to

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4. Methodology

In this part of my thesis the way the research will be done, is discussed. Because this is a case study, the work of Yin (2003) will be used as a background. First the case company will be described, and the process of supplier selection will be handled. Hereafter the research design and the

measurement of concepts will be elaborated. As a last part, pattern matching as an analysis technique is described. In the appendix the structure of the interviews together with the work minutes can be found.

4.1 Research design

This research can be classified as a case study, Yin (2003) defines a case study as “an empirical inquiry that investigates a contemporary phenomenon within its real-life context”. Where in this thesis the concepts of power and trade credit are investigated in the surrounding of the case company, this research can be classified as a case study.

The design of the research refers to the logic that links the data to be collected to the initial question of the study. To get a better view on this, first a return to the initial question in this research is essential. This thesis is written from the central question: How does a power distribution influence the trade credit that is extended?

Where in the spectrum of research strategies available, many forms of research questions are available, the how and why questions are best congruent with a case study design (Yin 2003 p.22) In the theoretical section, this central question is approached by sub-questions which are itemized. An overview of the existing knowledge about both the separate items and the interaction between them is given.

The theoretical section shows that hardly any explicit previous research can be found about the direct interaction between the two concepts. The value of a power distribution as a determinant of trade credit, is one that is based on an indirect relationship. The existence of opportunistic behavior of a supplier makes that this supplier will reap the benefits for its own interest.

The results above shed some light on the central question. This knowledge is used as a background, and this makes the research more explanatory than exploratory. Though the absence of previous direct research contributes to the exploratory level of this thesis.

Based on the results from the theoretical section, expectations can be formulated for the aspects that determine a power distribution. Where volume and the level of specialism of the product are driving forces behind the creation of a dependency, these aspects ask for extra attention. In the selection of suppliers, these aspects play an important role.

In designing the research, besides the role of the literature, the exact definition of the unit of analysis is essential. This relates to the challenge of formulating the exact case. In the definition of the unit of analysis, a clear difference between the unit of analysis and the unit of observation is important. The unit of observation is the basic level on which observations in the case study are done. The unit of analysis can be the same level, or at a higher level. (Fisher 2007). In my thesis the unit of

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29 analysis will be done at the level of all the selected suppliers. This makes that the unit of analysis is situated at a higher level, namely at the overview of the individual relations.

When the data is collected, the logic linking the data to the propositions has to clear. In this thesis “pattern matching” is used as this logic. This approach is developed by Campbell (1975) when he tried to relate patterns of information from the case to theoretical propositions. This same technique is used by Trochim (1989) where he defines a pattern as an arrangement of objects or entities. In this, a pattern is not random and to some extent describable. Two or more potential patterns are formulated on the basis of information from the theoretical section. Then a comparison between these and the observed pattern is made to see which matches best with the observations.

In this matching, the criteria for interpreting the study’s findings become essential. Here, the level of contrast is important. The observed pattern is compared with possible theoretical patterns. From the two potential theoretical patterns, the one that contrasts least with the observed pattern is

selected.

The research as proposed above can be classified in the terms of Yin (2003) as a single case holistic design. Where this research takes only one case in consideration, although multiple supplier relations are studied, it is clearly a single case design. The research is holistic, due to the fact that it does not take sub-units or embedded items in account. The unit of observation is the individual relationship of the central actor with an individual supplier, the level of analysis consists the overall level of these relationships, but this still keeps the research holistic, where no sub-units for both the supplier and the central actor are involved.

4.2 Validity

Validity can be seen as an indicator of the quality of the research design, where high validity represents high research design quality (Yin, 2003). Eisenhardt (1989) describes three forms of validity: Internal validity, external validity and construct validity. These three forms will be assessed for this research.

With regard to internal validity, this research makes use of pattern matching to add to a higher level of internal validity. This is complemented by the addressing of rival explanations. By making use of theory the external validity for a single case is enlarged. This matches with the use of pattern matching where a theoretical pattern is examined. This combined enlarges validity.

Where this thesis makes use of a survey to determine the dependency position, combined with an open question, semi structured interview, multiple sources of evidence are used which adds to the construct validity of the research. Measures to indicate the dependency position are taken from previous research, which adds to the level in which the research investigates what it claims to investigate. (Gibbert et al. 2008)

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4.3 Measurement of concepts

In the theoretical section all three central concepts have been elaborated. With this information, in combination with previous research, measures will be developed for the present situation at the case company in relation to the eight selected suppliers. The construction of this measurement tool will now be depicted for every of the concepts.

4.3.1 Power

From the theoretical section, both the work of Krajewski (2005) and Gelderman and Van Weele (2003) comes forward as valuable. First the transformation from Krajewski’s theory towards a measurable output will be depicted, after that Gelderman and Van Weele will be handled.

As indicated in the theoretical section, for the construction of a measurement scheme, Krajewski will be selected. This is due to the focus that he has on the individual firm level, and this is congruent with the individual level at the case company.

In his work, Krajewski uses several other authors as a funding of the five parameters for the creation of a power difference. This adds to the generalizability of the research. As mentioned in the literature overview, the work of Heide (1996) and Frazier and Rody (1991) is prevalent in this summary. The researches of both mentioned have been fully operationalized. They have both used questionnaires to detract a numerical value for the concept of power.

The questionnaires used in the researches can also be applied for this thesis. Frazier and Rody used their questions considering dependencies at 930 distributor firms in the United States and Heide made use of a sample set of 400 manufacturing companies. This operationalization of the measures from Krajewski is also used in this thesis. The survey questions from both researches are used directly for the case company. It is noteworthy that Payan and McFarland (2005) describe the research of Frazier and Rody as “broadly used in marketing channels to indicate the power

distribution in a business to business context”. This is emphasized by the fact that both researches have been cited in more than 200 researches.

The questionnaire that is constructed, can be found in the appendix. This is a direct depiction of the questions that are used in the above mentioned two researches.

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31 In the rating, first the linkages between the questions and the five determinants that Krajewski uses have to be clear. This is done by comparing the five determinants with the questions that are used. Every determinant is measured by several survey questions, this is depicted in the table 2:

Factor from Krajewski Survey question

 Major customers for the component: 5,9,10,11,13

 Market share for the component: 4,5,12

 How many companies produce the component for the buyer 5,7

 How many companies could produce the component for the customer? 3,6,8

 Annual revenues attributed to the customer % 4,5

Table 2: Links theory and survey questions

Where some determinants are measured by more questions than other determinants, the sum of the ratings is divided by the amount of ratings to give an average rating for that determinant.

In the rating on a Likert Scale, a low score refers to the situation in which the supplier has most power. A high rating refers to a situation in which the supplier has least power.

After a score for every determinant is generated, an overall supplier power score is needed. This is created by taking the average of the scores on the five determinants. This score will be referred to as the Krajewski score.

Where this research is qualitative in its nature, the focus lies on the non-statistical data inquiry. This focus comes forward most strongly through the interviews. For every supplier relationship a separate interview is recorded. The guidelines and work minutes can be found in the appendix. For the

measurability of the concept of power, this guideline gives support. The guideline focuses first on a verbal depiction by the interviewee of the power and dependency situation concerning the supplier. The structure of this guideline is based on the findings from the theoretical section. The focus that was given on the level of substitutability and the volume considering this supplier get much

attention. Because of the explorative character of the research, open questions are first asked. When the respondent mentions one of the two concepts above, further questioning is applied. This

strategy can be checked in the working minutes of the interviews.

Where in the theoretical section the framework of Gelderman and van Weele is dominantly present, this is used in the interviews as well. The framework of Gelderman and van Weele is diagnostic for the role that the supplier has for the buyer. But in relation to power, the findings from Gelderman and Caniëls (2005) are interesting. In their research they find that bottleneck and strategic suppliers tend to have a power advantage over buyers.

The assessment of this framework, where supply risk and profit impact are used to position a supplier, contributes to the understanding of the dependency structure between the buyer and supplier.

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32 this framework in the analysis will lead to a deeper focus on the determinants of a power

distribution.

From the theoretical section the factors of volume and substitutability came forward as concepts that needed extra attention. To realize this, both concepts are taken in the measurement scheme for a power distribution.

Based on the previous, a measurement scheme is constructed for the concept of power. This can be found in table 3:

Supplier: ………

Concept: Power

Aspect: Low Medium High

Role in G and W framework:

Volume:

Substitutability

Krajewski score

Additional information from the interview

Table 3: Power measurement scheme

In the results section, this scheme will be used as a summary of the results that were found. As the final output, every supplier will get a rank for the concept of power. This is done on the basis of a high, medium, low scale. This division in three, is chosen to give a most complete reflection of the results and for the comparison between the suppliers. The ranking is an indication of the concept of power, so when substitutability is high, power will be low and therefore low will be marked in the scheme.

4.3.2 Trade Credit

For this concept, the formula stated in the theoretical section is used to construct the measure for the attractiveness of the trade credit.

This is the following formula:

(Formula comes from Ng, Smith and Smith 1999) This formula calculates the implicit rate, the opportunity cost for the buyer when he does not make use of the offered possibility of delayed payment. In calculating this opportunity cost, the implicit rate is the difference between paying on the ultimate net date, the last day that is possible to still make use of the discount, and not making use of this discount.

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33 Where the present value of a euro next year is calculated using the inflation rate, this rate is

published by the CBS. In 2011 the inflation in the Netherlands amounted 2.3 percent.1

To measure the value of one sided trade credit, this rate of 2.3 percent is calculated in a day rate. To find the value of the net period, this day rate is raised to the power of the amount of days towards the net date.

By using this method, two sided trade credit is calculated as an opportunity cost, and one sided trade credit is calculated in a present value. This gives a difference where present value as percentage will be much lower than the implicit rate. Where this thesis is a qualitative research, the research focuses on the eight selected suppliers. These will both be analyzed individual and comparative. In this comparative analysis the difference between one and two sided trade credit will be taken sharply in account, where two sided is much more attractive due to the discount offered.

Just as for the concept of power, a scheme is generated for the concept of trade credit. This scheme will also take in account the pricing policy of the supplier in case. This is done to give the underlying price more attention.

This leads to the following measuring scheme in table 4:

Supplier ………

Concept Trade Credit

Aspect: Low Medium High

Debtor period

Price policy

Value of TC comprised from formula

Additional information from the interview

Table 4: Trade credit measurement scheme

Just as for the concept of power, also trade credit will be ranked on a low, medium and high scale per supplier. A high score implies attractive terms for the trade credit. The measurement scheme is designed to give a depiction of the attractiveness of trade credit terms, when the debtor period is low, this implies unattractive terms.

4.3.3 Opportunism

In the theoretical section an overview is given of the facilitators and antecedents for opportunistic behavior. In this thesis the level of supplier opportunism is measured in every of the eight supplier relations. This is done by the use of open questions in the interview based on these three

antecedents for opportunistic behavior.

The guideline for the interviews is constructed in such a way that all three facilitators get attention. First an overall estimation for the opportunistic behavior is asked from the interviewee. This is then deepened by a focus on the three antecedents for opportunism found in the literature. First the level of formalization, how many rules apply in the interaction, is assessed. As comes forward in the selection table for suppliers, the difference between a contract and non-contract supplier is of much influence here.

The influence of a power distribution in a business to business context on trade credit