EXPLORING THE UNDERLYING MECHANISMS WHICH INFLUENCE SUPPLIER IMPROVEMENT APPROACHES UNDER DIFFERENT POWER
CONDITIONS:
AN AGENCY THEORY PERSPECTIVE
Final Version Master’s Thesis
Research Master Operations Research and Operations Management University of Groningen, Faculty of Economics and Business
REVEALING THE UNDERLYING MECHANISMS WHICH INFLUENCE SUPPLIER IMPROVEMENT APPROACHES UNDER DIFFERENT POWER
CONDITIONS:
AN AGENCY THEORY PERSPECTIVE
Ernst-Jan Prosman (e.j.prosman@student.rug.nl) University of Groningen, Department of Operations, Groningen, The Netherlands
Kirstin Scholten University of Groningen, Department of Operations, Groningen, The Netherlands
Damien Power University of Melbourne, Department of Management and Marketing, Melbourne, Australia
Abstract
Purpose – The purpose of this paper is to gain a deeper understanding of the effectiveness of
buyer initiated Behavioral Based Governance Methods (BBGMs) to improve supplier performance. The aim is to reveal underlying mechanisms such as power imbalances between buyers and suppliers, the type of BBGM and other contextual factors and relate this to Agency Theory.
Design/methodology/approach – An explorative multiple case study approach is used to
investigate the reasons why BBGMs are effective or not. Data are collected from buying companies. The paper balances induction with early structure to relate emerging findings to Agency Theory.
Findings – The present paper identifies several underlying mechanisms which can explain
BBGM effectiveness such as power differences, resource-intensiveness, the presence of supplier-related benefits within BBGMs, institutional differences, turbulence of the business conditions and perseverance of the buyer.
Practical implications – The findings derived from this research provide practitioners with
better understanding on how to improve supplier performance and where to pay attention to. The observation that performance of powerful suppliers can be improved by adding joint benefits to the BBGM could be very useful for practitioners.
Originality/value – This explorative research contributes to existing theory by refining
Agency Theory and making it an useful theory for analyzing supplier improvement approaches.
Introduction
In today’s interconnected world organizations depend on supplier performance to create customer value (Tan, et al., 2002). Moreover, when suppliers do not perform well – e.g. too late deliveries, or short falling product quality – it likely results in serious damage to the buyers’ business performance (Hendricks & Singhal, 2005). It is therefore not surprising that improving supplier performance has attracted growing attention both in literature and in practice and that there exists an ample body of literature on effectively improving supplier performance, see for example Giunipero et al. (2006), Mortensen and Lemoine (2008) and Prajogo & Olhager (2012). However, the buyers’ ability to improve supplier performance is influenced by power imbalances between buyers and suppliers (Cox, 2001). Unfortunately, in spite the extensive body of literature on improving supplier performance (e.g. Prajogo and Olhager (2012)) and on the influence of power on this (e.g. Zhao et al. (2008)), the field of supply chain management (SCM) has developed independently of existing theories even though strategic management theories can be valuable in avoiding supply problems (Hitt, 2011). Since Agency Theory is a well-developed theory for examining buyer-supplier relationships (Ketchen & Hult, 2007; Rungtusanatham, et al., 2007) and offers solutions for improving the performance of defaulting suppliers (Zsidisin & Ellram, 2003), in this study we will use Agency Theory in order to gain a deeper understanding of the effectiveness of supplier improvement initiatives under different power conditions.
Drawing on the basic assumptions of Agency Theory, that self-interested behavior, bounded rationality, goal incongruence, risk aversion and information asymmetries determine the probability that suppliers deliberately default (Fama & Jensen, 1983; Jensen & Meckling, 1976), this research explores how power imbalances between buyers and suppliers influence the effectiveness of Behavioral Based Governance Methods (BBGMs). BBGMs comprise a wide range of methods such as supplier certification, demand and information sharing and supplier development (Zsidisin, et al., 2004; Zu & Kaynak, 2012) and require different amounts of resource commitment from the supplier (Celly & Frazier, 1996; Zsidisin & Ellram, 2003). As the aim of BBGMs is to hinder suppliers to put in less effort than agreed upon, negligent suppliers will rather not prefer to allocate resources to BBGMs. Subsequently, resource intensive BBGMs can be expected to suffer more from self-interested supplier behavior than low resource intensive ones. At the same time literature suggests that risk averseness manifested in power imbalances between buyers and suppliers influences the effectiveness of BBGMs (Cox, 2001). However, the impact of power remains not well established. While according to Hausman and Johnston (2010) and Van Donk and Van der Vaart (2005) powerful suppliers significantly reduce the effectiveness of BBGMs, Cox (2001) and Zhao et al. (2008) are milder about the negative influence of power. This ambiguity justifies a further exploration in relation to the impact of power from an Agency Theory perspective as it leaves open a critical question for buyers: why are the buyer’s supplier improvement initiatives affected by power differences between them and their suppliers?
to deal with defaulting suppliers (Hitt, 2011). Simultaneously, this knowledge can be applied to practice, where it gives managers guidelines on success factors of particular improvement initiatives. Managers contribute from this since virtually every company encounters situations where stronger of weaker suppliers default.
This paper is organized as follows. We begin by arguing why Agency Theory is an useful avenue to study the effectiveness of SCM practices in improving the performance of defaulting suppliers. We thereafter review literature on Agency Theory while linking this to supplier improvement initiatives and power imbalances in buyer-supplier relationships. We then present our case study design, followed by a brief description of our cases. We subsequently posit our results followed by an analysis and discussion of our results where we develop propositions for future research simultaneously. We conclude our study with a conclusion and the managerial and theoretical implications.
Literature Review
In buyer-supplier relationships buyers delegate the delivery of certain goods to suppliers. Along with the delivery of the goods, the responsibility of a timely delivery, meeting certain quality standards, etc. are normally delegated to the supplier (Zu & Kaynak, 2012). However, suppliers may have various reasons for not performing the delegated tasks in conformance with the contract. To name a few reasons, suppliers might overstate their capabilities in order to win the contract; lowering the product quality might reduce the supplier’s costs and postponing deliveries might result in economies of scale by combining orders. Supplier defaults are more likely to happen when contracts do not cover all performance aspects or when suppliers are able to conceal their difficulties in meeting the contract (Starbird, 2003; Swink & Zsidisin, 2006). The supplier defaults and can manifest themselves in the following ways:
- not delivering the products at the precise time; - not delivering the products in the precise quantities; - not delivering the right quality; and
- not being able to ramp-up or ramp-down the delivered quantities in accordance with the flexibility terms in the contract (Chen & Paulraj, 2004; Ho, et al., 2002; Whitten, et al., 2012).
Since the above listed manifestations of supplier defaults harm the buyer’s profits (Hendricks & Singhal, 2005), buyers need to ensure that suppliers do not default (Zu & Kaynak, 2012).
There is a wide range of tools that buyers can use to improve the performance of defaulting suppliers. These tools include, but are not limited to, information sharing, supplier development programs and directly changing the supplier’s processes (Humphreys, et al., 2004; Krause, et al., 2000; Modi & Mabert, 2007; Prahinski & Benton, 2004). However, these different tools have different costs and, most likely, have different impacts on the performance of the defaulting supplier (Carr, et al., 2008). It is therefore important for buyers to select the appropriate tool.
2004; Ketchen & Hult, 2007). Besides, as postulated by Jensen and Meckling (1976) and Eisenhardt (1989), Agency Theory can be used when:
- supplier defaults arise due to self-interested supplier behavior; - buyers are rationally bounded which results in incomplete contracts;
- there exist information asymmetries which enables suppliers to conceal their defaults; and
- buyers, as being the principle, have to determine how to circumvent supplier defaults. Adding that Agency Theory has already provided valuable insights in studying buyer-supplier relationships (Ketchen & Hult, 2007; Rungtusanatham, et al., 2007), studying the underlying mechanisms which affect the effectiveness of supplier improvement tools through the lens of Agency Theory seems justified. In the following section we will provide an outline of Agency Theory and how it can be used to deal with defaulting suppliers.
Agency Theory
Agency Theory, at its most basic sense, is concerned with circumventing problems arising in an agency relationship, which we define as a contract under which the principle (the buyer) engages the agent (the supplier) to perform some service on their behalf (Jensen & Meckling, 1976). In this agency relationship, agency problems arise from goal incongruence, bounded rationality, information asymmetry and risk aversion as those underlying mechanisms instigate and enable suppliers to act self-interested (Fama & Jensen, 1983; Jensen & Meckling, 1976; Logan, 2000). Suppliers attempting to maximize their own position (self-interested behavior) leads to agency problems when there is goal incongruence between the buyer and the supplier (Fama & Jensen, 1983; Jensen & Meckling, 1976). Moreover, due to bounded rationality it is impossible for a buyer to cover all possible performance defaults of suppliers by contract, thereby rendering suppliers a platform to act self-interested. In addition, the possibility for suppliers to default is amplified by possible information asymmetries which hinder buyers to monitor the supplier (Eisenhardt, 1989; Heath, 2009; Heide, 2003). Nevertheless, the probability and the impact of agency problems depends on the level of risk aversion of the supplier (Eisenhardt, 1989). The less risk-averse the supplier, the higher the probability and impact of the agency problem as it is more likely that the supplier will put the relationship at stake (Fama & Jensen, 1983; Jensen & Meckling, 1976; Logan, 2000). The supplier’s risk aversion increases when its security and income are tied to the particular buyer (Eisenhardt, 1989; Tate, et al., 2010)
conditions rather than understanding how and why buyers can cope with defaulting suppliers via outcome-based measurements. We define BBGM effectiveness as the degree to which the BBGM closes the gap between actual performance and desired supplier performance in the therefore predetermined time.
Why power influences the effectiveness of BBGMs
Recall that the less risk-averse the supplier is, the more likely it becomes that the supplier is willing to put the relationship at stake (Fama & Jensen, 1983; Jensen & Meckling, 1976; Logan, 2000). For the same reason, Agency Theory discourages the employment of BBGMs when suppliers are not risk averse since suppliers with a low level of risk aversion are more inhibited to act self-interested and are therefore more likely to impede BBGMs (Eisenhardt, 1989; Zu & Kaynak, 2012). Arguably, suppliers have various reasons to impede the deployment of BBGMs because of their self-interested nature:
- their asset’s specificity might increase due to investments, which creates greater dependence and possibly leads to undesired power erosion (Williamson, 1981);
- they fear to lose power by sharing information, which is often required in BBGMs (Croom, et al., 2000; Sezen, 2008); and
- they might have no incentives to collaborate as they might rather spend their resources otherwise (Batt & Purchase, 2004).
Käkhönen (2014) found empirical support that these reasons harm the effectiveness of BBGMs.
On the other hand, risk averse suppliers are less likely to impede BBGMs due to their self-interested nature (Eisenhardt, 1989; Zu & Kaynak, 2012). This argument is also supported by empirical evidence: Provan (1993) found that risk averse suppliers are more willing to cooperate; Modi and Mabert (2007) found that suppliers with high levels of risk aversion are more willing to embark on development programs and Takeishi (2001) shows that suppliers which are risk averse are more likely to engage in integration efforts in the automotive industry. In addition, Hartley and Choi (1996) suggest that risk averse suppliers act less resistant towards BBGMs.
However, the level of the supplier’s risk aversion, and therefore the likelihood that suppliers impede BBGMs, depends on the degree to which the supplier’s income and security depends on a particular buyer, (Eisenhardt, 1989; Tate, et al., 2010). In other words: Suppliers are more committed to the buyer-supplier relationship when their income depends on the buyer and are therefore more likely to act risk averse. Interestingly, power also ensues from dependence between parties (Caniëls & Gelderman, 2007; Hausman & Johnston, 2010). Bacharach and Lawler (1981, p. 65) define power as ‘the dependence of one party [buyer or supplier] compared to the dependence of the other party [italics added]’. Following this definition, power resides at the least dependent party (Bacharach & Lawler, 1981; Hausman & Johnston, 2010). Therefore, albeit risk aversion and power are distinct phenomena, they are highly correlated as they both link to the same underlying mechanism of dependence. Hence, Agency Theory discourages the employment of BBGMs when suppliers are powerful and encourages the employment of BBGMs when buyers are powerful.
scale of methods. It is therefore unlikely that there is one universal explanation which explains the effectiveness of BBGMs under different power conditions. The next paragraph will elaborate on this.
Why resource intensiveness influences the effectiveness of BBGMs
As mentioned, the umbrella term ‘BBGM’ comprises a wide range of different methods to prevent suppliers from defaulting. These methods, however, can be classified based on their resource intensiveness as Danase (2006) and Krause et al. (2000) argue that improvement initiatives such as BBGMs require different amounts of resource commitment from the supplier. Resource intensiveness increases, for example, when suppliers have to make investments, the supplier’s employees engage in employee exchanges or when the supplier has to train or educate its employees (Krause, et al., 2000). Figure 1 provides examples of how BBGMs differ in their resource intensiveness.
Resource intensiveness
Low High
Supplier certification Awarding suppliers
Demand information sharing Target costing
Supplier development
Figure 1 – Examples of BBGMs and their resource intensiveness
Classifying BBGMs based on their resource intensiveness is important because resource intensive BBGMs, opposed to low resource intensive BBGMs, are arguably more vulnerable to powerful suppliers because the more resource intensive the BBGM, the more likely it will result in at least one of the following situations:
- Intensified collaboration via higher asset specificity (Williamson, 1981); - Increased information sharing (Croom, et al., 2000; Sezen, 2008); and - Higher investments on the behalf of the supplier (Batt & Purchase, 2004).
Recall that these situations are the same reasons that will cause a supplier to act self-interested and impede the BBGM. Suppliers, and especially powerful suppliers, are therefore arguably more inhibited to impede resource intensive BBGMs than low resource intensive BBGMs.
Overview
impede BBGMs. Agency Theory argues that suppliers are more risk averse when they are dependent of the buyer. This same dependence is the underlying mechanism which determines the power position of the buyer and the supplier. Here, the dependent party is powerless and, thus, risk averse. Hence, powerless suppliers will not impede BBGMs whereas powerful suppliers will. Applying a multiple case study we expect to gain deeper understanding of the effectiveness of BBGMs under different power conditions in line with the aim of this paper.
Figure 2 – Theoretical framework
Methodology
To empirically investigate the effectiveness of high and low resource intensive BBGMs in different power contexts, we adopted an explorative multiple case research design (Eisenhardt, 1989b). Given the exploratory nature and aim of this study, a case study design was particularly suited as it allows us to gain a holistic and in-depth understanding of the underlying mechanisms of the phenomenon (Eisenhardt, 1989b; Ellram, 1996; Yin, 2009). The multiple case approach was employed to gather comparative data. Moreover, adopting a multiple case study approach augments external validity and guards against misjudgment on a single event (Barratt, et al., 2011; Voss, et al., 2002) and, to a degree, improves the generalizability of the study (Voss, et al., 2002). We define the unit of analysis as a BBGM in order to investigate whether or not the effectiveness of BBGMs is affected by power and resource intensiveness – and in which way. In order to capture the effectiveness of the BBGMs in solving supplier defaults, a retrospective approach is employed (Pettigrew, 1990; Pentland, 1999) as BBGMs normally have long lead times, possibly adding up to several years, before results are achieved (Zu & Kaynak, 2012).
Case selection
The 13 buying companies involved in this study were all medium to large sized companies as the buying companies need (financial) resources to engage in BBGMs and small companies are unlikely to possess these resources (Zsidisin & Ellram, 2003). Furthermore, to obtain a solid perspective, we focused on BBGMs used by buyers procuring tangible items as Van der Valk and Van Iwaarden (2011) argue that there is a difference between the procurement of tangible items and the procurement of services. Moreover, excluding service firms seems justifiable since service firms are normally less involved in BBGMs compared to manufacturing or trading firms because supplier defaults are likely to have less detrimental effects on the overall firm performance of service firms (Zsidisin & Ellram, 2003)
Dependence on the relationship / power
Risk aversion
Level of manifestation of self-interested supplier behaviour
Reasons for suppliers to act self-interested:
- Asset specificity - Fear of losing power - Less or no incentives for
The cases itself – the BBGMs – were selected based on theoretical replication of the two main variables resource intensiveness of BBGMs and the power conditions. This resulted in four different research settings as depicted in the first column of Table 1. For each research setting we selected cases until we reached theoretical saturation (Eisenhardt, 1989b). As a result of the four research settings and the therefore different contexts, the BBGMs were applied in various industries ranging from consumer electronics to industrial equipment to book publishers. Although we are aware of the impact of context, the problems encountered by the buying firms were quite similar across research settings; hence we do not expect there to be related biases in our findings.
Data collection
The core of the data collection consisted out of semi-structured interviews with knowledgeable key persons which were selected based on their long-term involvement in the buyer-supplier relationship and the application of the BBGM. Moreover, where necessary, we interviewed multiple persons about the same BBGM, thereby increasing the construct validity (Voss, et al., 2002; Yin, 2009). Table 1 provides an overview of the data sources. The interviews took place in the period April 2013 to March 2014. Prior to the interviews, each participant received a document outlining the aim of the interview and the topics being explored during the interview. The interviews lasted about one hour with some continuing up to three hours and were, if allowed, recorded and transcribed verbatim. Where necessary, data collection was followed up with emails and calls to fill in missing details. We did not interview suppliers but we relied on written documentation about supplier performance and the content of the BBGM along with the buyer’s perception of the supplier’s reaction towards the BBGM.
The main part of the interviews followed a standard core to facilitate data comparison and to increase reliability (Voss, et al., 2002; Yin, 2009). The interviews were organized under broadly defined themes with open-ended questions and probes to encourage detailed responses. Themes covered in the interviews were:
- the power relation between the buyer and the supplier; - the nature of the supply problem;
- the content and resource intensiveness of the BBGM; - the willingness of the supplier to adopt the BBGM; and
- the effectiveness of the BBGM: the degree to which the BBGM closes the gap between actual performance and desired supplier performance (contractual performance) in the therefore predetermined time.
Research setting
Case Principal domain
in industry Buyer size* Supplier size* Location of the supplier
Content of the BBGM Supply problem Data source(s) Years of
experience 1: buyer power; low resource intensive BBGM A Bathroom and wellness products
Large Small Netherlands Meetings; small process adjustments Product quality; delivery performance Senior buyer; Lead buyer 15 years 5 years B Façade construction Large Medium Netherlands Meetings Delivery
performance; transparency
Head purchasing 15 years
C Publishing of educational books
Large Medium China Meetings; supplier certification Delivery performance; transparency
Procurement manager 9 years
D Fast food restaurant chain
Large Large Belgium Meetings; small process changes Product quality Trade Manager; Product manager; Senior stock manager; Archival sources 8 years 9 years 1 year 2: buyer power; high resource intensive BBGM
E Infant care products Large Small Netherlands Information sharing; meetings; employee exchange; process changes
Delivery performance; agility
Purchase manager 19 years
F Pipeline protection Medium Small Netherlands Information sharing; meetings; investments
Delivery performance; product quality
Purchase manager 11 years
G High-tech machine tools
Medium Small Netherlands Meetings; investments Product quality Operations manager; Purchaser A Purchaser B 5.5 years 11 years 7 years H Off-shore drilling solutions
Medium Small Lithuania Meetings; investments Product quality Supply chain manager Archival sources 4.5 years 3: supplier power; low resource intensive BBGM I High-end customer electronics
Medium Large Malaysia Forecast sharing; evaluation reports
Delivery performance
Purchase manager 12 years J Advertising
press-world
Medium Large Netherlands Forecast sharing; meetings Delivery performance Product manager; Archival sources 16 years 4: supplier power; high resource intensive BBGM
K Floorcoverings Medium Large Germany Investments; meetings; integrated IT.
Product quality; delivery performance
Supply chain manager; Project manager
6 years 1 year L Agricultural
products
Large Large Netherlands Meetings; employee exchange; process changes
Product quality; agility
Head purchasing 8 years M Air heat exchangers Large Large Austria Process changes; investments Delivery
performance
Supply chain manager; Archival sources
* Based on the criteria of the Dutch Chamber of Commerce. A company is considered as ‘medium’ when they meet at least two out of the three following criteria: total value of the assets: €4.4 – 17.5 million; turnover: € 8.8 – 35 million; number of fte’s: 50 – 250. A company is considered as ‘large’ when they score above the aforementioned upper limits for at least two out of the three times. In all other cases, a company is considered as ‘small’.
Data analysis
The data analysis started simultaneous to data collection to allow for more and in-depth data on initially surprising observations (Miles & Huberman, 1984) – for example the unexpected effectiveness of BBGMs in research setting 4 where the suppliers were more powerful and the BBGMs were resource intensive. The data analysis itself progressed through multiple stages whereby we, similar to Scholten et al. (2014), tried to balance induction with early structure through an analytical deductive approach following a recursive iterative process to relate our data and findings to existing theoretical frameworks – i.e. Agency Theory (Eisenhardt & Graebner, 2007). Atlas.ti was used to manage the data analysis process in a systematic and consistent manner, as well as to fragment, re- assemble and re-code data so as to generate findings progressively (Tippman, et al., 2013)
In the within case-analysis, we firstly applied a data reduction approach to make the rich and extensive amount of data more manageable and to provide us with order and structure in the data (Miles & Huberman, 1984). The data reduction approach consisted of creating first-order codes for the data items – interview transcripts and archival sources – ranging in length from a few words up to several paragraphs to filter out data truly applicable to the aim of the research (Gioia, et al., 2013). The quotations in Table 2 and Table 3 are examples of first order codes ensuing from this step. As the interview transcripts were all in Dutch, we carefully translated the quotes into English while trying not to lose meaning. We limited the data loss resulting from the first-order coding and from the translations by reading through the transcripts several times afterwards (Dey, 1993). Moreover, based on the first-order codes we composed case narratives which we sent back to the interviewees for verification.
In the next part of the data analysis we deducted descriptive second-order themes in line with the main variables of this research (power and resource intensiveness) by linking the first-order codes to these variables. The insights from the resulting second-order themes allowed us to assign each case to the corresponding research setting. Next to that, in line with the exploratory nature of this research, we inductively searched for (potential) underlying mechanisms which might affect BBGM effectiveness and assigned them descriptive second-order themes. Examples are the presence of supplier benefits and institutional differences between buyers and suppliers. See Table 2 for an example of this coding stage.
Subsequently, we deducted descriptive second-order themes for BBGM effectiveness (either effective or ineffective BBGMs) supported by first-order codes. In line with the Gioia (2013), the second-order themes were combined in an overarching aggregate BBGM effectiveness – see Table 3 for an example of this process. These coding steps involved frequent iterations between data and the emerging codes.
findings by Agency Theory. In doing so, we moved constantly back and forth between the our findings and theory.
Overall, multiple data analysis iterations, constantly moving between the data, the codes and theory, confirming the validity of the analysis by sending it back to the interviewees and using Atlas.ti to manage the data analysis process in a systematic and consistent manner aided to the trustworthiness of the data (Lincoln & Guba, 1985).
First-order codes Second-order themes
“It was a large supplier, yes a really big player”
“They have other customers which order much larger quantities than we do”
“When we switch to another supplier, it implies that we have to re-design our product all over again. This will cost a lot of money and it is uncertain if our product still meets the customer requirements”
“When there are very specific conditions for your product, then you are bound to that supplier and are they relatively powerful”
Supplier power
“We engaged in a dialogue with the supplier and we agreed to share forecasts” “We went to their factory for two days and performed a value-stream mapping in order to identify possible process improvements which would lead to improved delivery performance”
“So the supplier, in response to the value stream mapping, has hired someone, a consultancy agency”
“They have putted in a lot of effort. Absolutely. They had to change their production processes and they have had a lot of internal discussions”
“They had to make investments in their production process.”
High resource intensiveness
“The supplier did not use the forecast and he said that our forecast was not reliable. But the forecast was reliable, they just did not want to use it”
“The supplier ignored our complaints. I think that they should have acted more adequate by allocating more resources to the problem [this was before value stream mapping was applied]”
Low risk aversion
“The value-stream mapping has, in the end, resulted in that the supplier realized that they should do something. We exposed large work in progress stock piles in their factory and a very high inefficiency”
First-order codes Second-order themes Third-order dimensions
“The supplier did not use the forecast and he said that our forecast was not reliable. But the forecast was reliable, they just did not want to use it”
“whether you like it or not, when you have nothing to offer they won’t do anything for you”
“The supplier ignored our complaints. I think that they should have acted more adequate by allocating more resources to the problem [this was before value stream mapping was applied]”
Observation supplier performance report: in the last
two summers (July and August) the supplier has a delivery performance between 90 and 92%
“The low delivery performance in the summer is caused by the increased demand for air heat exchangers worldwide so they are not able to meet our demand and when you are a small supplier, you are the last one being served”
Ineffective BBGM
Broadly effective BBGM in improving delivery performance
“Everyone is willing to improve, even when you have a monopoly in the market. Even those suppliers are willing to talk to you about improvements”
“The value-stream mapping has, in the end, resulted in that the supplier realized that they should do something. We exposed large work in progress stock piles in their factory and a very high inefficiency. So the supplier, in response to the value stream mapping, has hired someone, a consultancy agency. This has improved the delivery performance a lot”
“Really, within half a year they reached an efficiency performance of 96%, our target”
Observation supplier performance report: delivery
performance increased from 80% to almost 100% expect for July and August.
Effective BBGM
Table 3 – Progression of coding the effectiveness of BBGMs of case M (excerpt)
Empirical results
In line with the aim of this research, the following paragraphs reveal the underlying mechanisms which affect BBGM effectiveness. Overall, we found that BBGMs are more effective when buyers are powerful. However, when the BBGM includes supplier benefits, BBGMs are also effective in cases of supplier power. In addition, besides power, resource intensiveness and supplier benefits, we found that institutional differences, perseverance and the turbulence of the business conditions affect BBGM effectiveness. The remainder of this section will elaborate on this in more detail and is organized by revealing the underlying mechanisms for each research setting separately.
Research setting 1: Powerful buyers and low resource intensive BBGMs
or their reputation being dependent on the buyer: “the supplier knows we can quickly replace them… and, well, then it [the BBGM] will be executed. They got no choice: otherwise they will not get the next order” (Case B). Also the supplier evaluation reports of case D supported the effectiveness of BBGMs in this research setting as it showed that supplier performance improved and reached the desired level shortly after the implementation of the BBGM.
However, at the same time, institutional differences negatively influenced the effectiveness of BBGMs. According to the measures of Abelson and Black (1986) and Walsh (1995) consisting of differences in regulatory rules, social knowledge and norms and values, China is intuitionally different from Western Europe. The procurement manager of case C, where the pressing of books is outsourced to a press-house in China, mentioned that “…their [China’s] culture is different from our [the Dutch] culture. They find it more difficult to deliver bad news and therefore postpone this until the latest moment... They think that delivering bad news has a detrimental effect on the relationship… This has harmed the effectiveness [of the BBGM] in the beginning”. However, this is not in as much an issue of intentionally impeding a BBGM. Instead, the supplier in case C seems to be afraid of risking the relationship. Their different perception of what is important for a sustainable relationship harmed the effectiveness of the BBGM. In fact, the supplier was willing to adopt the BBGM once they understood this. As the procurement manager of case C declared: “repetition is important. Not just one time saying that you want them to be honest about the production progress. You have to repeat it continuously, until they understand how you want it to happen. It took some time but in the end it resulted in excellent delivery performance [as they started to communicate production delays according to the BBGM]”. So, although institutional differences may hamper BBGM effectiveness, it seems that powerless suppliers located in other parts of the world – countries which are institutionally different – are willing to adopt low resource intensive BBGMs which are initiated by powerful buyers.
Research setting 2: Powerful buyers and resource intensive BBGMs
Our findings indicate that buyer power plays a positive and eminent role in the effectiveness of resource intensive BBGMs. For example, the supply chain manager from case H stated that “when they do not work on their points of improvement [the BBGM], we simply say goodbye to them”. The operations manager of case G explains that ‘[due to our buyer power] we can demand everything we want… We say to the supplier that when they do not make the investments we demand, we will go to another supplier”. Likewise, the supplier in case F has to meet “strongly recommended improvements” and similar words were used in case E where the supplier constantly feels the pressure of being replaced by another supplier. As a result, all buyers within this research setting claimed that the suppliers were willing to solve the problems and to implement the BBGMs.
were afraid we would copy their processes and take production in-house”. The supplier clearly did not trust the buyer here and feared further power erosion. The supplier in case E and case F, on the other hand, initially resisted to make the required investments due to the associated costs. Nevertheless, both the supplier not trusting the buyer and the supplier resisting to make the required investments did not result in unimplemented BBGMs. After the buyers exerted extra pressure of replacement, the suppliers were coaxed to adopt the BBGM. Nonetheless, the resistant attitude of the suppliers resulted in a more cumbersome start-up phase of the BBGM. This, in turn, resulted in longer lead times before supply problems were solved.
Furthermore, similar to research setting 1, institutional differences seem to affect the effectiveness of resource intensive BBGMs. In Case H, the supplier was located in Lithuania in the former East bloc, a country which is institutionally different from Western Europe (Abelson & Black, 1986; Walsh, 1995). The buyer’s supply chain manager explained: “I have been there a couple of times now to solve the problems. However, language is a big problem as they barely speak English. Plus their culture is non-European”. These institutional differences caused the early implementation of the BBGM to be troublesome due to misunderstandings. It seems therefore not to be an issue of intentionally impeding the BBGM. This is supported by archival sources – supplier evaluation reports – which showed almost no improvement in the early phase of the BBGM but increasing supplier performance once the BBGM was completely implemented.
Further, our findings indicate that the turbulence of the business conditions influences the effectiveness of resource intensive BBGMs. As the supply chain manager of case H points out: “It [the BBGM] is rather complex and difficult to implement. The requirements [due to legislation and increasing requirements of end customers] change quickly… This explains why the supplier performs not always as desired as it is difficult for him to comply to all this [the content of the BBGM]”. In this case, the BBGM needed long lead times due to high turbulence in the business conditions which made the BBGM more difficult to implement. As a consequence, before the BBGM was fully implemented, legislation and/or customer requirements had already changed and the content of the BBGM had to change accordingly. Nevertheless, the BBGM slowly closes the gap between actual and desired performance and the archival sources show that supplier performance became closer to the desired performance after each change in the content of the BBGM. However, in the end it took more than 10 years (from 2001 to 2012) to reach the desired performance level.
Research setting 3: Powerful suppliers and low resource intensive BBGMs
achieved improved supplier performance. Instead, the BBGMs yielded negative results as “the costs of our efforts did not weigh to the little improvements of the supplier, if there were improvements at all” (Case J). The above findings suggest that low resource intensive BBGMs are not effective in cases of supplier power as suppliers have no incentive to adopt the BBGMs and their powerful position enables them to resist the BBGMs.
Research setting 4: Powerful suppliers and resource intensive BBGMs
Within this research setting, the effectiveness of BBGMs is negatively influenced by supplier power. Quoting the head of purchasing from case L “A supplier who cannot afford losing us as a customer will be more inclined to come up with improvements such as improved delivery performance… Well, with such suppliers you have, in general, a very good relationship. However, suppliers who are more powerful are less inclined to concede to your wishes”. So, it seems that BBGMs which are not in the self-interest of the powerful supplier will be declined.
While we would have expected more reluctance of powerful suppliers to implement resource intensive BBGMs when compared to setting 3, our findings indicate that the negative influence of powerful suppliers seems to be reduced, or even diminished – all BBGMs within this research setting effectively improved supplier performance. We observed two underlying reasons for this. First, the BBGM in case L was successful as “it helped the supplier to improve its products which [in turn] helped the supplier to maintain their good reputation in the market”. Similarly, in case M, the buyer performed value stream mapping and exposed redundant inventory as well as inefficient processes at the supplier’s site: “This value stream mapping, eventually, made the supplier aware that something has to change. We encountered huge, unnecessary, work in progress stock piles within the factory and there were also many inefficiencies [in their production process]. The supplier, as a result of our value stream mapping, hired a consultancy firm to improve its processes”. On the advice of the consultancy firm, the supplier made substantial improvements which sorted in better supplier performance “This [the BBGM] has led to drastic performance improvements. Really, within half a year, their delivery performance conformed to our performance objectives”. The improved delivery performance was confirmed by the supplier performance reports. Likewise, in case K, the other customers of the supplier also benefited from the improved yarn quality and, as such, the BBGM has strengthened the competitive position of the supplier. This suggests that when BBGMs include supplier benefits, suppliers are willing to accept the BBGM.
supplier improved the quality of the products. This, in the end, resulted in increased supplier performance.
Nevertheless, the role of supplier power cannot be discarded in this research setting as powerful supplier are less willing to accept BBGMs. At the same time it seems that incorporating supplier benefits or just persevere in implementing the BBGM neutralizes the negative effect of power.
Overall, our results reveal that the effectiveness of BBGMs can be explained by power differences, resource-intensiveness, the presence of supplier-related benefits within BBGMs, institutional differences, turbulence of the business conditions and perseverance of the buyer. In the following section we discuss why those factors have an impact on the effectiveness of BBGMs and how those factors can be linked to literature and in particular to Agency Theory.
Discussion
In this study we aim to explore underlying mechanisms which influence the effectiveness of high- and low resource intensive BBGMs were we defined effectiveness as the degree to which supply problems were solved within the set timeframe. Although Agency Theory has already been used to investigate supplier improvement tools (Zsidisin & Ellram, 2003; Zu & Kaynak, 2012), we have not found research that uses Agency Theory to reveal underlying mechanisms which influence the effectiveness of a wide range of BBGMs applied under different power conditions. Based on our current understanding of Agency Theory we developed a conceptual model which suggested that BBGMs are less effective when suppliers are more powerful, especially when the BBGM is resource intensive as suppliers likely react more obstructive towards highly resource intensive BBGMs. By applying a multiple-case we revealed additional underlying mechanisms influencing BBGM effectiveness. These underlying mechanisms explain why actual BBGM effectiveness deviates from the expected effectiveness as our conceptual model suggests – see figure 3
Figure 3 – The effectiveness of BBGMs per research setting
The effect of power on the effectiveness of BBGMs
Following the assumptions of Agency Theory, BBGMs effectiveness is influenced by the underlying mechanism of power, and therefore, dependence; BBGMs ought to be more effective when buyers are powerful and less effective when suppliers are powerful as a consequence of risk aversion (Celly & Frazier, 1996; Eisenhardt, 1989). Our findings are congruent on this point with Agency Theory: in research setting 1 and 2, the powerless suppliers cannot afford risking the relationship by impeding the BBGMs and therefore embark on the BBGM. In research setting 3, on the other hand, the suppliers do risk the relationship by impeding the BBGMs and also in research setting 4 the buyers indicate that powerful suppliers are less inclined to concede to the BBGM. Hence, in line with Agency Theory, we pose the following proposition:
Proposition 1: BBGMs are more effective when buyers are more powerful; BBGMs are less effective when suppliers are more powerful.
Nevertheless, in research setting 4 and in particular in research setting 3 we found empirical support for the findings of Cox (2001), Hausman & Johnston (2010) and Käkhönen (2014). In these research settings we found powerful suppliers who did not want to cooperate. This can, at least to a certain extent, be attributed to suppliers acting out of self-interest.
The role of resource intensiveness
Agency Theory’s assumption of self-interested behavior suggests that BBGM effectiveness is influenced by the resource intensiveness as suppliers are more inclined to resist resource intensive BBGMs as these BBGMs lead to power erosion (Croom, et al., 2000; Williamson, 1981) and undesired investments (Batt & Purchase, 2004). Our findings, however, show that while this reasoning holds for cases of buyer power – it took longer before BBGMs were implemented – it does not hold for cases where suppliers are powerful. A possible explanation for this phenomenon is that BBGMs in cases of supplier power are less buyer-specific and therefore more in the interest of suppliers as our findings suggest that BBGMs in settings of powerful buyers are mainly focused on buyer related benefits whereas BBGMs in settings of powerless buyers are more focused on joint benefits. This change in BBGM content is in line with Cox (2007) who argues that power affects how buyers and suppliers approach each other. In addition, the buyer adapting the content of the BBGM and the supplier accepting the BBGM can be explained by Agency Theory as well. The former can be explained by the buyer who understands the low level of risk aversion of the supplier and therefore incorporates supplier benefits to make the BBGM in the self-interest of the supplier. The latter can be explained by the self-interested nature of the supplier as the supplier benefits from accepting a BBGM which improves its overall performance and, as such, its competitive edge (Eisenhardt, 1989). Based on the above discussion, we pose the following propositions: Proposition 2: The higher the resource intensiveness, the more obstructive suppliers are and the longer it takes before BBGMs are implemented.
Proposition 3: Buyers align the content of resource intensive BBGMs with the power context: the more powerful the buyer, the more buyer oriented the benefits are; the more powerful the supplier, the more supplier oriented the benefits are.
Proposition 4: Suppliers are less inclined to reject resource intensive BBGMs when supplier benefits are incorporated into the BBGM.
The role of institutional differences
Abelson and Black (1986) and Walsh (1995), Malaysia is intuitionally different from Western Europe. In research setting 3, the powerful supplier impeded the BBGM due to self-interest and low risk aversion, not because of institutional differences. Nevertheless, as institutional differences cause longer lead times for the BBGM to be effective, we pose the following proposition, which should be considered along with proposition 1:
Proposition 5: Institutional differences complicate the implementation of BBGMs which results in longer lead times before BBGMs become effective.
The role of perseverance and the turbulence of the business conditions
Our findings indicate that the underlying mechanism of perseverance leads to more effective BBGMs even though the BBGM is resource intensive, is imposed on a powerful supplier and does not include joint benefits. This observation is supported by Hartley and Jones (1997). We therefore propose that:
Proposition 6: Perseverance can overcome the negative effects of supplier power and the lack of supplier oriented benefits on the effectiveness of BBGMs.
Finally, we revealed that the turbulence of the business conditions is also an underlying mechanism in determining the effectiveness of BBGMs. We observed that when business conditions are turbulent – e.g. due to changing legislation – BBGMs will be less effective. Zsidisin and Ellram (2003) argue that BBGMs need long lead times to achieve supplier improvements. When turbulent business conditions do not provided BBGMs with the necessary time, it will take longer before the BBGM closes the gap between desired and actual supplier performance. In line with this, we propose that:
Proposition 7: BBGMs with long lead-times are less effective when business conditions are turbulent.
This is an important finding since today’s supply chain managers find themselves evolving in managing more and more complex supply chains in terms of rapidly changing, continuously expanding and often uncertain business conditions (Manuj & Sahin, 2011).
Conclusion
The main question addressed in this research is which factors influence the effectiveness of BBGMs. We answered that question by examining the effectiveness of BBGMs using a multiple case study. The results indicate that the underlying mechanisms of self-interested behavior and risk aversion explain the effectiveness of BBGMs. BBGMs are effective when suppliers do not act self-interested due their high level of risk aversion. BBGMs are less effective for the opposite reason. However, BBGMs which include joint benefits are in the self-interest of suppliers and, as such, suppliers with a low level of risk aversion are willing to accept BBGMs. Finally, our study shows that institutional differences, buyer perseverance and the turbulence of the business conditions of the problem are underlying mechanisms which affect the effectiveness of BBGMs as well.
how much power they had and might have impeded BBGMs for reasons which we do not know. A second limitation relates to the retrospective nature of this study. We tried to limit the potential of a hindsight bias by triangulating the data with archival sources and sending back the results to the interviewees for a final check. However, we did not get access to archival sources in all cases. Moreover, for some cases, we relied on only one sole interviewee. A final limitation is that we have only three cases with institutional differences between buyers and suppliers and only one case where perseverance or the turbulence of the business conditions play a role. As a consequence, propositions 5, 6 and 7 are only scantly backed by empirical observations and should be regarded as tentative.
This research offers numerous opportunities for future work. To start with, in line with the above limitations, future research should include the supplier’s perception on why they either impede or support BBGMs. These perceptions, then, can be used to further refine Agency Theory. Next to that, confirmatory work should be conducted to increase the generalizability and validity of this research. Such research should include huge amounts of quantitative data which should be used to test the propositions of this research. Furthermore, although we found that incorporating joint benefits into the BBGM is important when improving the performance of powerful suppliers, it remains unclear to what degree joint benefits should be included into the BBGM. Likewise, we did not measure the magnitude of the underlying mechanisms on BBGM effectiveness. Future work should shed a light on this.
Implications for theory
A major contribution of this research is based on theory refinement of Agency Theory. A review of the literature on studying buyer-supplier relationships from an Agency Theory perspective reveals that Agency Theory suggests that agents – suppliers – react in the same way to all types of BBGMs (see for example Eisenhardt (1989), Zsidisin and Ellram (2003) and Zu and Kaynak (2012)). However, by using the arguments of Danese (2006) and Krause (2000) we argued that there is a wide range of BBGMs which can be ranked based on their resource intensiveness as suppliers would react differently to high resource intensive BBGM than to low resource intensive BBGM due to their self-interested nature. Our results show that this is indeed the case and that suppliers react more obstructive towards resource intensive BBGMs, see proposition 2. Furthermore, our discussion reveals that BBGMs including supplier benefits are perceived differently by suppliers than BBGMs without supplier benefits (see proposition 4). This can also be explained by the self-interested nature of suppliers. Next to the different supplier reactions towards BBGMs, we identified contextual factors which influence the effectiveness of BBGMs. Institutional differences, perseverance and turbulent business conditions do have an impact on the degree to which BBGMs improve supplier performance and should therefore be considered along with Agency Theory’s recommendations for improving supplier performance.
Implications for managers
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Appendix A: Interview Protocol
Interview introduction
Thank you for your time. In the next 1 – 1.5 hours, we will ask you questions regarding solving supplier problems in your firm by means of a, so called, ‘behavioral based governance method’ (BBGM).
A BBGM is an approach to ensure that suppliers perform well and to avoid problems in the future. Examples of such approaches are supplier development, target costing, quality improvement and supplier certification. Are there any questions about BBGMs so far?
The BBGMs differ in their degree of supplier effort. Some behavioral based governance methods require a lot of supplier efforts whereas others do not. For instance, supplier certification requires a lower level of supplier effort than supplier development. Besides this distinction, we can also distinguish between the power distribution of the relationship: either buyer power of supplier power.
The two variables describe above result in the following matrix:
Research Settings
Low supplier effort BBGM High supplier effort BBGM
Buyer power Research setting 1 Research setting 2
Supplier power Research setting 3 Research setting 4
The interview is structured in mainly three topics. We first ask you some general questions about the company and about your position. Secondly, we identify a situation which fits in the above matrix. In this situation, we are interested in the power relation, the problem, the BBGM to solve the problem and the required effort that the supplier need to put into the BBGM. Thirdly, we ask you to remember this situation, which has occurred within your organization, while answering questions about the efficiency of the BBGM.
We would like to tape the interview in order to assure the quality of our report. The tape will be kept confidential and will be destroyed after the research is completed. Is it okay for you if we tape this interview?
Do you have any questions or remarks before we start? If not, then we will start the interview.
--Start tape now--
Part I: General Information Company information
Name: ... Address: ... Main market:
