University of Groningen
Buyer behaviors and preferred
customer status of a make-to-order
supplier: A case study
Master thesis, Msc supply chain management
Faculty of Economics and Business
Dini Pi 2013/8/18
1 Abstract
Content
Abstract ... 1
1. Introduction ... 3
2. Literature review ... 4
2.1 Preferred customer status ... 4
2.2 Mode of interaction ... 5
2.3 Mode of operation ... 5
2.4 Conceptual model development ... 6
3. Methodology ... 7
3.1 Research design ... 7
3.2 Measurement development ... 8
3.3 Data gathering and analysis ... 9
3.4 Data analysis ... 9
3.5 Reliability and validity ... 9
4. Results ... 10
4.1 Mode of interaction and operation ... 10
4.2 Identify the variables ... 10
4.2.1 The variables of interaction ... 11
4.2.2 The variables of operation ... 13
4.3 The perceptions of the supplier ... 13
4.3.1 The perceptions of the sales manager ... 14
4.3.2 The perception of the production manager ... 15
4.4 The relevant behaviors which help achieve a preferred customer status of an MTO supplier ... 15
5. Conclusion ... 16
6. Limitation and future study ... 17
References ... 18
Appendix 1 questionnaires ... 22
Questionnaire 1 (first meeting with buyers) ... 22
Questionnaire 2 ... 24
Questionnaire 3 (supplier-sales manager and production manager ) ... 25
3 1. Introduction
In order to gain competitive advantages of customization and flexibility, lots of
companies apply make-to-order production systems (Olhager & Prajogo, 2012). For
make-to-order (MTO) suppliers, it is difficult to achieve a good delivery reliability performance (Ebadian, Rabbani, Torabi, & Jolai, 2009). This is because that the involved unknown factors make it complicated to plan and schedule the production in an MTO situation (Ebadian et al., 2009). For example, there is often a high level of variability in MTO with respect to the arrival times and processing times of different orders. Thus, it is difficult to predict how and when the orders will be released in the shop floor and when will be finished (Kingsman, Tatsiopoulos, & Hendry, 1989). It is a challenge for buyers to improve the reliability of MTO suppliers, especially when the suppliers are limited in availability. Becoming a preferred customer of the supplier is one of the solution to improve the MTO supplier reliability regarding the production planning and scheduling process of MTO suppliers (Ebadian et al., 2009). The reason is that the MTO supplier processes the orders from its most important customer first. When the supplier receives a new order from the customer, the order is first kept in a waiting-order pool instead of being released to the shop floor immediately (Ebadian et al., 2009). Ebadian et al. (2009) state that the MTO suppliers make decisions about the releasing priority of each new arriving order according to the importance rates of the associated customers. Therefore, the buyer who is a preferred customer of the supplier receives a higher delivery reliability.
important drivers in the way to become a preferred customer of an MTO supplier. This also provides practical guidelines for buyers who seek to be preferred customers of suppliers in MTO context. Like Jarzabkowski and Wilson (2006) state: “actionable tools” for managers are necessary for a field to mature (Jarzabkowski & Wilson, 2006).
Given the gaps in the literature, we seek to answer the research question:
Do mode of interaction and mode of operation have an influence on achieving the preferred customer status of an MTO supplier? If yes, which are the key variables? What buyer behaviors help achieve the preferred customer status of an MTO supplier?
In order to answer the research question, we did a multiple-case study. First, we explored the mode of interaction and operation of three customers. Three customers are with different degrees of preference of one make-to-order supplier. Second, we compared their behaviors and filtered out the distinct behaviors. Third, we incorporated the supplier perception and identified which are the key drivers.
This article contributes to the literature into two aspects. First, it filled the gaps between theory and practice and propositions. Second, it identified the variables in MTO context and provided hypotheses in future survey studies.
2. Literature review
2.1 Preferred customer status
5
supplier, if the supplier offers the buyer preferential resource allocation.”(p11). Nollet et al (2012) defined that “A preferred customer is a purchaser (buying organization) who receives better treatment than other customers from a supplier, in terms of product quality and availability, support in the sourcing process, delivery or/and prices.”(p1187) Until then, the concept and the definition of preferred customer status become clearer.
From their work we can conclude that suppliers differentiate their customers and give certain customers preferential treatments. Generally speaking, Suppliers allocate more resources to those customers who are regarded as more important. The resources could be tangible resources such as capital investment and human; and intangible resources such as time and technology. Some examples of the preferential treatments are providing good quality, service and price, informing the new product ideas, providing the unique cost reduction opportunities, and allocating rich materials (Bew, 2007; Moody, 1992).
2.2 Mode of interaction
There are four dimensions of interaction: 1) communication, 2) reaction and 3) interaction structure construction, and 4) Information (Hüttinger et al., 2012). How the buyers perform in these four dimensions determines the mode of interaction. The communicating includes language communicating and behavior communicating such as arranging face-to-face meetings, visiting the supplier’s company, inviting the supplier to have a tour in buyer companies, communicating the problems, and communicating the status of the business. The reaction includes responding the supplier politely and quickly, making the reaction in high quality, and answering the questions openly and honestly (Essig & Amann, 2009; Forker & Stannack, 2000; Maunu, 2003; Nyaga, Whipple, & Lynch, 2010). A buyer’s behaviors in interaction structure construction include keeping the availability of direct contact in the buying firm, defining the roles and responsibilities, using different communication media (Essig & Amann, 2009; Maunu, 2003). The information exchange includes, providing sales information, giving supplier full inventory visibility, being open to share relevant information, keeping supplier informed of innovations and sharing performance measurement results with the supplier (Nollet et al., 2012).
2.3 Mode of operation
produce a large number of orders belonging to few products is usually easier than planning to produce a small number of orders from many products”(p 5772). Buyer The operational behaviors of buyer influence the MTO supplier’s decisions. The mode of operation is comprised of buyer operational behaviors in ordering, paying, and supporting .
2.4 Conceptual model development
Hüttinger et al. (2012) state that a cooperative, relational-driven mode of interaction is more appropriate than a competitive outcome-based relationship when preferred customer status is to be achieved. They reviewed the previous work and present that relational factors play an important role in achieving preferred customer status. Benton and Maloni (2005) argue that suppliers appear to be more focus on the relationship atmosphere. Blonska (2010) states that the relational capital (trust and commitment) positively influences the degree of strong bonds with the supplier and leads to preferential treatments from the supplier. These cooperative interaction mode is comprised by appropriate behaviors in communication, reaction, structure construction and information exchange. Leenders, Fearon, Flynn, and Johnson (2002) suggest that extensive communications and rapid responses are useful tools in the interaction. Forker and Stannack (2000) argues that organizing interaction in a way that enhances suppliers’ feeling of reciprocity and transparent improves supplier satisfaction. So we propose:
A cooperative, relationship-driven mode of interaction is positively related to the possibility of achieving the preferred customer status of an MTO supplier.
Achieving a high production efficiency in MTO context is complicated because of the involved unknown factors such as different arrival times and processing times of different orders (Ebadian et al., 2009). MTO suppliers prefer developing a strong relationship with customers who help achieve a stable and reliable production system. That is to say, buyer’s operational behaviors have an influence on the preferred customer status. The customers who are operationally stable and reliable are more competitive to achieve preferred customer status. So we can propose:
A stable, reliable mode of operation is positively related to the possibility of achieving the preferred customer status of an MTO supplier.
7 Figure 1: the conceptual model
3. Methodology
The conducted research aims at identifying the variables of interaction and operation on becoming a preferred customer of an MTO supplier. In our study, the production environment (MTO production) of the suppliers is the contextual factor which has been taken into account. Yin (2003) states the exploratory case study is used to when contextual factors are taken into account. We did a multiple case study to explore three buyers’ behaviors to an MTO supplier. The supplier is Guangyou Group, which is the biggest instant vermicelli supplier in China and occupied the 43% domestic market share. The three customers are two wholesalers and a supermarket and have a long-term relationship with Guangyou.
3.1 Research design
Unit of analysis
There are two types of units of analysis in the research - an individual customer, and the supplier. We explored the how the customers behave during the interaction and how the supplier treats them. The data we needed were collected from each individual customer and the supplier.
Case selections
We selected three cases with the assistance of the sales manager of Guangyou based on three criteria. First, we selected the buyers who performed the behaviors to one
MTO supplier-Guangyou. This made the cases comparable. Second, the buyers had similar procurement values. We selected the buyers who had been developing a business relationship with Guangyou for more than 5 years. In the last five years, their purchased products valued between RMB 5,000,000-6,000,000 every year on average. Third, the supplier held different preference degrees to the three customers- one is a highly preferred customer, one is a lowly preferred customer, and one is a normal customer.
3.2 Measurement development
We used the annual order-receipted rate and on-time delivery rate to measure the preferred customer status. Like Ebadian et al. Ebadian (2009) states: “due to the high variety in characteristics of arriving orders as well as system limitation such as available capacity, the firm is not able to meet all orders within their predetermined due dates.”(p5768) In this respect, some orders are undesirable. The Supplier rejects the undesirable orders, in the meanwhile, schedules the releasing rates of the accepted orders. Suppliers decide the desirability and releasing-priority of the order based on the importance rating of the corresponding customer (Ebadian et al., 2009). The orders which are released early tend to be more possible to be delivered on-time. So the order-accepted rate (OAR) and the on-time delivery rate (OTAR) is a reflection of the preferred customer status. So we use the results of OAR multiplying OTAR to measure the degreed of supplier’s preference. In our research, we set that the result between 90% - 100% indicates that the customer is highly preferred by the supplier. The result between 80%-90% means that the customer is preferred by the customers. Customers who got results under 80% are normal customers. The on-time delivery rates and order accepted rates to the three customers in 2012 are listed below:
Buyer * Order-accepted rates in 2012 (OAR) On-time delivery rates to in 2012 (OTDR) ** Reflection of preferred customer status OTDT*OAR A 98% 99% 97.0% B 94% 89% 83.7% C 83% 90% 74.7%
9 3.3 Data gathering and analysis
To facilitate our study, we asked the purchasing managers of the three buyer companies, and the sales manager and production manager of Guangyou to participate our research. The purchasing managers are the ones who conduct and perform the behaviors to the supplier. The sales manager of Guangyou who has a direct contact with the buyers is familiar with the multitude of interfacing activities that existing between their company and customers. The operations manager of Guanyou who plans and schedules the production must be knowledgeable about the relationship between buyers’ activities and production process. By doing this, the informants of our research included organizational actors from different functional areas and provide diverse perspectives. The approach of involving different informants can limit the data bias (Eisenhardt & Graebner, 2007).
Interviews are regarded as a highly efficient way to gather rich, empirical data and are used throughout the research procedure (Eisenhardt & Graebner, 2007). And semi-structured questionnaires (see appendix 1) were used to help collecting data. The semi-structured questionnaires included closed and open questions. The interviews focused on the managers’ experiences and perceptions of the behaviors. The interviews were conducted by face-to-face and by phone.
3.4 Data analysis
We recorded the conversation during the interviews. After the interviews, we transcribed the collected information and the transcribed information was reviewed and approved by the manager.
The data sets from different units of analysis were compared and combined.
3.5 Reliability and validity
The collected data had been transcribed into a confident research protocol, analyzed and commented on by the respondents (Yin, 2003). The transcribed information was reviewed and approved by the managers. This procedure ensured the internal and external reliability of the results.
4. Results
4.1 Mode of interaction and operation
Buyer company A and company B are the wholesalers who have cooperated with Guangyou for more than 10 years. Buyer A sell the products to retailers all over the country, while customer B focus on southeast areas of China. The retailers are local supermarkets and stores in the urban and suburb areas. Some big retailers also purchase from Guangyou directly, for example, buyer C. Buyer C is a chain supermarket which started purchasing from Guangyou five years ago.
Based on the behaviors of the three buyers, we present their mode of interaction and operation (see table 2). Buyer A regarded Guangyou as a very important business partner and had developed a cooperative interaction mode and stable operation mode. Buyer B also had a tight relationship with Guangyou, but their operation mode was unstable due to the limitation of technology. For buyer C, they used internal standard instruction to approach their suppliers. The mode of interaction between buyer C and Guanyou tended to be competitive, and the mode of operation tended to be unstable.
Mode of interaction Mode of Operation
Degree to be preferred
Buyer A Cooperative Stable High
Buyer B Cooperative Unstable Middle
Buyer C Competitive Unstable Low
Table 2: Mode of interaction and operation-buyer A, B, C
4.2 Identify the variables
11 Table 3: identified variables
4.2.1 The variables of interaction
1) Communication
Communication skills of the purchasing manager Technical knowledge of the purchasing manager The times of face-to-face meetings
The times of regular meetings
Whether from the same industry association
Purchasing managers are the people who approach the supplier most frequently. The communication skills and the relevant technical knowledge of the purchasing managers determine the effectiveness and the efficiency of the communications. In our study, the Buyer A and buyer B assigned certain purchasing managers to communicate with the supplier. The managers were good at communicating and were
familiar with the instance vermicelli industry. They developed an intimate
interpersonal relationship with the sales manager of the supplier.
We found that the frequencies of meeting with the suppliers were different. The buyer
Mode Elements Variables
Mode of interaction
Communication Communication skills of the purchasing manager
Technical knowledge of the purchasing manager The times of face-to-face meetings
The times of regular meetings
Whether from the same industry association
Reaction The speed of responses
The quality of responses
Interaction structure construction
Whether have a direct contact channel The clarity of definition of the roles and responsibilities
Information exchange
Level of inventory information exchanges Level of performance evaluation information exchanges
Mode of operation
Order process Ordering date
Stability of the demand Order lot sizes
Payments Times of on-time payment
A and B had a regular face-to-face meeting with the supplier every week, while the buyer C rarely had a face-to-face meeting with the supplier. The meeting gave suppliers and buyers an open floor to exchange their ideas, negotiate, and make agreements..
The other variable we found in our study is where the buyer and supplier are in the same industry association. The supplier, buyer A, and buyer B were in the same industry association. Members from the same industry association tended to have tighter relationship the other companies.
2) Reaction
The speed of response The quality of response
We found the speed of response and the quality of response mattered. The buyer A always responded the supplier within one day. If there were some big issues to discuss, they arranged the meeting immediately. Responding in a polite and patient way was a compulsory regulation to their staff. They also tried best to guarantee that the response information was reliable and accurate.
3) Interaction structure construction Whether have a direct contact channel
The clarity of the definition of the roles and responsibilities
The customers provided different channels for the supplier to contact them. The buyer A and B provided the supplier multiple channels to contact them. Beside the traditional channels such as phones and emails, they used new social media such as WeChat, Weibo, QQ.
How they define the roles and responsibilities is another variable. The definition of roles was not clear and definite in the interaction between the supplier and the buyer C. They didn’t have a commitment about the responsibilities distribution.
4) Information exchange
Level of inventory information exchanges
Level of performance evaluation information exchanges
13 4.2.2 The variables of operation
1) Order process Ordering date
Stability of the demand Order lot sizes
The ordering behaviors of the buyers varied in ordering date, ordering amount and order lot sizes. The buyer A negotiated the ordering date and amount with the supplier depending on the inventory situation. They always placed orders 20 days before the delivered date. They tried to keep order amount increasing steadily over the years. Another attempt was that they tried to integrate the orders and made orders in big lot sizes.
2) Payments
Times of on-time payment
The payment habits of the buyers were different. The buyer A and C had better payment habits than the buyer B. They had good records of timely payments.
3) Support
The ability of problem solving
They buyer’s ability to solve the problem from supplier varied. When problems happened, the buyer B would provide some information to the supplier. The buyer A assisted in solving the problems actively. They provided support in information, material, human, and resources .
4.3 The perceptions of the supplier
The opinions of the MTO supplier are presented in table 4. The sales manager and production manager highlighted and explained some variables.
Variables Informants
Sales manager
Production manager
Communication skills of the purchasing manager
Technical knowledge of the purchasing manager
The times of face-to-face meetings
The times of regular meetings
The speed of responses
The quality of responses
Whether have a direct contact channel
The clarity of definition of the roles and responsibilities
Level of inventory information exchanges
Level of performance evaluation information exchanges
Ordering date
Stability of the demand
Order lot sizes
Times of on-time payment
The ability of problem solving
Table 4: the perceptions of the supplier
4.3.1 The perceptions of the sales manager
The sales manager, which directly approaches the buyers, said that the communication skills of the purchasing manager influenced their decisions. There were large amounts of uncertainties in the MTO context and frequent communications were necessary in the sales process. The buyers who were active and easy to communicate improved the efficiency of the process.
The sales manager stated that they preferred to cooperate with the customers who were active in problem solving. The uncertainties of the MTO environment increased the risk to encounter problems. When they encountered problems, the cooperation between the suppliers and buyers can provide better solutions to the problems.
The sales director argued that buyers who made timely payments were more reliable. Timely payments from the customers could improve the supplier’s capital turnover rate, which also allowed the supplier to pay their supplier timely. Timely payments were regarded as a cornerstone of a good strategic relationship and could improve the performance of the whole supply chain.
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4.3.2 The perception of the production manager
The production manager preferred the buyer who was from the same industry association. The reason was that they were familiar with each other and they were of one mind to follow the explicit and implicit rules in the industry. Further, companies from the same association normally had some commitments which guaranteed the alignment the profits It was easier for them to achieve an agreement during the negotiation.
The production manager stated that the daily information exchange was a necessary condition to develop strategic relationships. That is to say, customers who performed information exchange more actively are preferred by the suppliers. The inventory situation of the customer was most important to production department. The inventory status of different customers had an effect on their production planning. Consider that both customers were with their satisfaction and were willing to share their inventory status and sales information with the supplier. Based on the inventory and sales information, the production department can acquire that one of the customers was facing higher out-of-stock risk and the other was facing lower risk. They production department would release the order from the customer who faced higher out-of- stock risk first. Because this decision would help maintain the service level of the buyer and avoid the end-customer churn. The satisfaction of the end customer increased and sustained the profit of the whole value chain.
After cooperating more than one year, the production manager paid attention to the way how the buyers place the order. For MTO suppliers, the stable and efficient production process was the key factor which helps them to improve production efficiency. While the involved unknown factors make the production planning and scheduling in MTO situation more complicated (Ebadian et al., 2009). Besides the quantities of the order, the production department concerned about the product ranges of the order. Customers who offered big lot sizes of few products were extended to be regarded as preferred customers. This was because planning to produce a large number of orders belonging to few products is usually easier than planning to produce a small number of orders from many products.
4.4 The relevant behaviors which help achieve a preferred customer status of an MTO supplier
supporting help construct a stable mode of operation. The MTO suppliers prefer a cooperative interaction mode and a stable operation mode. Therefore, the buyers have more chances be achieve the preferred customer status.
Figure 2：the relevant behaviors which help achieve a preferred customer status of an MTO supplier
5. Conclusion
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Since the concept of preference is very subjective, the buyer have to understand the supplier's perception and align its actions accordingly by using the appropriate behaviors (Hald, Cordón, & Vollmann, 2009). The buyers need to be more creative and choose appropriate behaviors in line with their resources (Christiansen & Maltz, 2002). The variables we find are important to MTO suppliers to determine if give the buyer preferred treatments.
6. Limitation and future study
During the interaction between the customer and supplier, buyer behaviors have an influence on the preferred customer status. However, Huiskonen, Niemi, & Pirttilä (2003) states the most important factors to determine the relative importance of different customers are customer’s profit contribution which can be reflected by customer’s total purchases from the supplier. The previous research doesn’t have a conclusion of how the supplier will make a decision when there is a conflict between procurement volume and behaviors. In our case, we selected the buyers who have the similar purchasing volume. In the further research, we will explore the supplier’s preference degree to two kinds of buyers: one kind is buyers who have large purchasing volume but don’t behave well, while the other is buyers who have small purchasing volume but behave well.
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Appendix 1 questionnaires
Questionnaire 1 (first meeting with buyers)
How long have you cooperated with Guangyou? How is your relationship with the sales manager?
How do you arrange the meeting? And how often do you meet? Where do you meet?
Do you have other activities together besides meeting? Have you even been to the plant of Guangyou?
Have the managers of Guangyou been to your company? How often does Guangyou contact you?
How long it takes to respond to them? How does Guangyou contact you?
When you contact Guangyou and When Guangyou contact you? Who of you arrange the regular meetings?
Do you change information with Guangyou? Like inventory information, sales information, performance information?
To what level do you exchange the information? How do you place the order?
When do you place the order? Do you have a stable demand?
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Questionnaire 2
Please write down the frequency you do the following behaviors.
Mode Elements Behaviors Frequency
Mode of interaction
Communication Assign certain purchasers with communication skills and technology background Arrange Face-to-face meetings Schedule regular meetings Join a same industry association
Reaction Respond in time Respond in high quality Interaction
structure construction
Build direct contact channel Define the roles and responsibilities clearly Information exchange Exchange inventory information Exchange performance evaluation information Mode of operation
Order process Place order 20 days before delivery date
Keep demand stable
Place orders in large lot sizes Payments Pay on the agreed date
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Questionnaire 3 (supplier-sales manager and production manager )
Will the following buyer behaviors influence your decisions? How and why? Please explain one by one.
1) Assign certain purchasers with communication skills and technology background Arrange Face-to-face meetings
2) Schedule regular meetings 3) Join a same industry association 4) Respond in time
5) Respond in high quality 6) Build direct contact channel
7) Define the roles and responsibilities clearly 8) Exchange inventory information
9) Exchange performance evaluation information 10) Place order 20 days before delivery date 11) Keep demand stable
12) Place orders in large lot sizes 13) Pay on the agreed date
Appendix 2
Mode Elements Behaviors Freqency of the behaviors
A(highl y-prefer red) B(lowl y-prefer red) C(norm al) Mode of interacti on
Communication Assign certain purchasers
with communication skills and technology background Very high Middle Low Arrange Face-to-face meetings High Very High Middle Schedule regular meetings
High High Low
Join a same industry association
High High Low
Reaction Respond in time Very
high
Very high
High
Respond in high quality Very
High
High Middle
Interaction structure construction
Build direct contact channel
High Very
High
Middle Define the roles and
responsibilities clearly
High High Middle
Information exchange Exchange inventory information Very high Middle Low Exchange performance evaluation information
Middle Middle Low
Mode of operatio n
Order process Place order 20 days
before delivery date
High Middle Low
Keep demand stable Middle Low Low
Place orders in large lot sizes
High Low Low
Payments Pay on the agreed date High Middle High
Support Solve problems
sufficiently and quickly
