Formal and Informal Communication in Buyer-Supplier Relations: Complexity and Environmental Uncertainty

Formal and Informal Communication

in Buyer-Supplier Relations:

Complexity and Environmental Uncertainty

Author:

A.C. van der Meulen

University of Groningen Faculty of Economics and Business

MSc Technology Management

June 2010

Abstract

Prior research on buyer-supplier relations primarily focussed on general communication flows in the supply chain and did not pay much attention to the formality of the communication. This research uses case studies to investigate the relation between the business conditions and the mix of formal and informal communication and the personal influences of employees. Business conditions that are investigated in this research are environmental uncertainty and complexity. The findings of this research give more insight in the relation between business conditions and formal and informal communication in buyer-supplier relations. The findings are useful for managers experiencing trouble in the communication with their buyers. The results of this research indicate that there is a relation between complexity and the mix of formal and informal communication. However, the relation between environmental uncertainty and informal communication mix is not clear and the results are mixed. Personal influences are the strongest in informal buyer-supplier relationships and as a result the communication performance is rated best.

1. Introduction

Good communication is of high importance for the success of companies. In the many dynamic processes of the supply chain, the quality of the external communication influences the performance (Mohr & Nevin, 1990; Chen & Paulraj, 2004). Within the field of communication a distinction can be made between formal and informal communication. Formal communication is used to structure and organize relationships between supply chain members (Vijayasarathy & Robey, 1997). Informal communication is used to improve relationships and increase trust between supply chain members (Cousins, Handfield, Lawson & Petersen, 2006a). Formal and informal communication both occur and often complement each other (Cousins & Menguc, 2006b; Mintzberg, 1979). This paper concentrates on the mix of formal and informal communication within the supply chain.

Prior research on formal and informal communication primarily focused on what the effects were within firms (i.e. Ouchi 1979; Litterst & Eyo 1983; Mintzberg, 1979). More recent research on formal and informal communication in the supply chain focused on general communication flows in the supply chain (Mohr & Nevin, 1990; Morh & Sohi, 1995; Mohr, Fisher & Nevin, 1996), formal and informal evaluations programs (Carr & Pearson 1999; Prahinski & Benton, 2004), formal and informal socialisation processes (Cousins et al, 2006a), and media selection in buy-supplier relationship (Ambrose, Marshall, Fynes, & Lynch, 2008). Formal and informal communication in the supply chain has only been a small part of recent research. No research has been carried out in the field of supply chain management specifically regarding the context of companies and its effects on the mix between formal and informal communication. Also, the influences of individual employees on the use of formal and informal communication are unknown.

experience difficulties in the communication with supply chain members. They will be able to analyze the market conditions their companies operate in and match these with the appropriate communication mix.

Since the contemporary research on the use of formal and informal communication in the supply chain is limited, case studies will be used to gain more insight in variables influencing the performance of communication. Case studies are especially relevant when the context is important (Voss, Tsikriktsis, & Frohlich, 2002). This research will be carried out by means of five case studies. Companies are selected on the basis of their differences in business conditions. It is aimed to find companies in all four areas related to both uncertainty and complexity (high/high, high/low, low/high, and low/low).

This thesis is organized as follows: the literature chapter discusses research about business conditions and formal and informal communication between companies, after which the research question is formulated. Subsequently, the methodology will be motivated; thereafter, interviews are analyzed. The final chapter is concerned with conclusions, limitations, and suggestions for further research.

2. Literature review

As noted in the introduction, prior research on formal and informal communication primarily focused on formal and informal communication within firms, but not between firms in the supply chain. Therefore this literature review starts with the use of formal and informal communication within firms and the differences with formal and informal communication between firms in the supply chain.

The second part of this literature review is used to explain how the formal and informal communication is used within the supply chain. Structure and routine are discussed as two distinctive factors mentioned in literature and a definition for formal and informal communication used in this research is formulated.

The third part starts with the media richness theory as an important theory for the selection of communication media in general. The media richness theory is linked to formal and informal communication and to the business conditions; uncertainty and complexity. Also a model is proposed regarding formal and informal communication in the supply chain.

The fifth part is dedicated to the influences of individual employees on the formal and informal communication mix and performance.

In the last part of this literature review is a model proposed regarding the business conditions and the formal and informal communication mix.

2.1. Formal and informal communication within firms

Before the early 1980s, literature about (in)formal communication mainly focused on control mechanisms within companies (i.e. Ouchi, 1979; Litterst & Eyo, 1983; Mintzberg, 1979). Mintzberg (1979, p10) summarized the development of these control mechanisms. In the scientific management of Frederick Taylor and the bureaucratic structure of Max Weber, activities were formalized by rules, job descriptions, and training. Mintzberg (1979, p50) describes formal communication as a way to regulate, predict and control behaviour in order to reduce variability. Formal communication is also used to ensure fairness and to protect employees.

Several authors have stated that formal communication within firms follows the organizational chart (Litterst & Eyo, 1983; Johnson, Donohue, Atkin, and Johnson, 1994). Formal communication is thereby structured by the organizational chart were authority and hierarchy are important factors (Johnson et al., 1994). Informal communication can occur outside the organizational chart and is regarded unstructured.

According to Litterst & Eyo (1983), formal communication is used for information dissemination and goal clarification. Information dissemination is the systematic distribution of information. Officially distributed information is used to keep employees better informed. Goal clarification suggests that employees effectiveness is enhanced by awareness of goals and policies (Litterst and Eyo, 1983).

informal communication, like leaking sensitive information or holding back important information for others.

The more comprehensive look of Mintzberg (1979, p11) and Litterst & Eyo (1983) still exists today in supply chain literature where there is an intertwined and often indistinguishable relation between formal and informal communication in the supply chain (Cousins & Menguc, 2006b; Cousins et al, 2006a ; Pagell, 2004). However, there are also differences between formal and informal communication within firms and between supply chain members. One difference is that communication is not only used as a control mechanism, but it is also used to increase collaboration between two independent firms. Another difference is that formal communication is not only used top down within a firm, but in the supply chain also occurs outside the firms own organizational chart. This specifically effects the informal communication, because employees in a supply chain do not meet each other without intent or in an informal setting.

2.2. Formal and informal communication between firms

In the supply chain context, external communication plays an important role in establishing and maintaining buyer-supplier relations. Communication in the supply chain can be defined as “the formal as well as informal sharing of meaningful and timely information between firms” (Anderson and Narus 1990, p. 44). This paragraph discusses several aspects of formal and informal communication between supply chain members. The first and second parts take a closer look at the two distinctive factors mentioned in supply chain literature that differentiates formal and informal communication; structure and routine. Formal communication is structured/routinized and informal communication is unstructured/non-routinized (i.e. Mohr & Nevin, 1990 and Cousins et al, 2006a). The last part of this paragraph is used to give a definition of formal and informal communication and how it is used in this paper.

2.2.1. Structured versus unstructured communication

Figure 1 shows that in communication between two independent companies the normal organizational structure is (partly) overruled by two different organizational structures.

Figure 1; Structured communication based on sources of information

Employees of companies in the supply chain meet each other based on an appointment or for business reasons and therefore there is less change on meetings in informal settings like the coffee corner or in the hallway between different employees of supply chain members. They are also likely to communicate mainly with their counterpart in the other firm. So, when structured communication is only based on communication following the organizational charts (top down and horizontal between the firms), almost all communication can be regarded as structured.

Only identifying structured versus unstructured communication is not enough to distinguish formal and informal communication. For example, suddenly a problem occurs and two counterparts decide to have a dinner and talk about the problem. The dinner is based on the roles and functions related to the problem, but the dinner can hardly be considered formal.

2.2.2 Routinized versus non-routinized communication

Closely related to the structured and unstructured view is the distinction between routinized and non-routinized communication. Formal communication is regarded as routinized and informal communication is regarded as non-routinized or ad hoc (i.e. Mohr & Nevin, 1990 and Cousins et al, 2006a). Routinized communication is simple, straightforward, rational, logical, and it does not contains surprises (Lengel & Daft, 1988). Routinized communication is predicable or occur frequently and therefore allows the development of rules and procedures, e.g. ordering processes and procedures for dealing with complains.

Routinized communication is not only used by means of explicit rules and procedures, but also by shared expectations. These shared expectations about information sharing encourage supply chain members to initiate and establish routines and procedures for communication and the usage of formal communication increases (Mohr & Sohi, 1995). Another contributor for more rules and procedures is the use of EDI systems. Vijayasarathy & Robey (1997) discovered a positive relation between EDI usage and the use of formal communication because EDI systems enable the use of rules and procedures.

Non-routine communication is ad hoc by nature. Informal communication is thereby more spontaneous, non-regulated, and are more personalized (Mohr & Nevin, 1990; Cousins et al, 2006). Examples of non-routine and informal communication are unexpected problems with regard to specifications or delivery times.

Formal communication Informal communication Structured

- Partly follows the organizational chart - Based on role and function employees Routinized

- Well known - Common reference - Happens frequently

- Allows the development of rules and procedures

Unstructured

- Can be outside the organizational chart - Not based on role and functions

employees Unroutinized - Relative unknown - No common reference - Ad hoc

- Used for real time problem solving Table 1: Summary of formal and informal communication between firms

2.2.3 Definition of formal and informal communication

So far, different aspects of formal and informal communication have been discussed. For the case studies it is important to have a clear definition of formal and informal communication. The definition of formal communication by Johnson et al (1994) takes into account that formal communication is at least based upon the role and function of the communicating employees in both companies. Informal communication on the other hand may be outside the role and function, but this is not required.

The most important difference between formal and informal communication is the routinized versus ad hoc aspect. Routinized means the communication is regulated based on written or unwritten procedures. Ad hoc communication is not regulated and only used when needed. It may be used when a problem arise or just a phone call about how things are going. Within this master thesis the following definitions of formal and informal communication will be used:

2.3. Business conditions in the supply chain

Communication in the supply chain is used to reduce uncertainty and to deal with ambiguity (Ambrose et al., 2008). Companies within the same supply chain transfer different kinds of information and can choose from a wide range of communication media.

This paragraph starts with the media richness theory of Daft & Lengel (1984), which is used to explain how communication media are selected to transfer different kinds of information. The media richness theory is also linked to formal and informal communication.

In the next two parts of this paragraph, the business conditions of environmental uncertainty and complexity will be analysed and linked to the media richness theory and formal and informal communication.

2.3.1 Media Richness Theory

The media richness theory describes how communication media are selected based on uncertainty and ambiguity of the processed information (Markus, 1994, Daft & Lengel, 1986). The richness of a medium is based on four criteria: 1) the speed of feedback, 2) the ability to use multiple cues like body language and voice tone, 3) the use of natural language, and 4) the ability to readily convey feeling and emotions (Jablin et al., 2001, p 628).

According to the media richness theory, rich media are used to deal with ambiguous information. Due to immediate feedback, the use of body language, the use of natural or speaking language, and the ability to show feelings and emotions, rich media allow rapid exchange of information in a short time so the ambiguity is lowered. Media with low richness are better in dealing with large quantities of unambiguous information. Rich media are for example used for solving problems and media with low richness are used for placing recurring orders.

Uncertainty is reduced by more frequent communication and ambiguity is reduced by using rich media. Using rich media generally is more effective, but more expensive in terms of time spent (Daft & Lengel, 1986). Therefore, it is more efficient to use media with low richness when dealing with large amounts of unambiguous information (i.e. for recurring orders).

misunderstanding, characterized by time pressure, ambiguity, and surprise (Lengel & Daft, 1988). Table 2 shows the communication media based on the richness of it.

Medium Richness Formality Senses used Language Feedback

Face-to-face Highest Informal Visual, Audio Body, Natural Immediate Videoconference Informal Visual, Audio Body, Natural Immediate

Telephone Informal Audio Natural Immediate

Instant messaging Informal Visual, Audio Natural Immediate

Email Formal Visual, Audio Natural Quick

EDI/XML Formal Limited Visual Natural Quick

Mail Formal Limited Visual Natural Very slow

Numeric Lowest Formal Limited Visual Numeric Slow

Table 2: Media Richness Scale (Bron: Daft & Lengel, 1986 and Ambrose et al, 2008)

As shown in Table 2, communication media are seen as informal for the richer media and formal for the less rich media (lean media). This does not mean that a medium is regarded as only formal or informal, but more as mostly formal or mostly informal. This balance between formal and informal communication within the communication media differ because of the specific task or kind of information shared.

An example of the more formal or informal use of a communication medium is when email is mainly used for the processing of orders. The ordering processes are normally structured and routinized and the medium is thus used formal. In another situation, the same orders are done by EDI systems and the email is only used when there are some general questions or problems. In the second example, email is used more informal.

orders can be considered formal when they set a time line and make rules in advance or make them during the process. For example, informal communication is used when a problem suddenly occurs. The communication medium for solving this problem should according to the media richness theory be rich because immediate feedback and natural language are important. For instance, this problem could be solved in a face-to-face meeting, during which agreements are made for a structured and routinized solution with formal communication.

Although the media richness theory explains the media choice on an individual level, it is reasonable to expect that its mechanism can be applied to the abstract level of communication (patterns) between companies in the supply chain. The balance of the overall formal or informal communication in an organization is determined on a strategic and tactical level where communication is structured and regulated to match the need of the supply chain.

2.3.2 Complexity

The first business condition that will be considered is complexity. Van Donk & Van der Vaart (2004) and Welker et al. (2008) consider the business condition complex if flexibility is seen as an order winner, demand is characterized by wide variety, and production is characterized by many production lines, many operations, and make-to-order (MTO) or engineer-to-order (ETO) production approaches.

The business conditions are considered simple when costs and speed are order winners, demand variety is low, and production is characterized by few production lines, large batch sizes, and make-to-stock (MTS) production. Products are standardized and well known in supply chains with a low complexity and communication between supply chain members is largely about orders, price, product information and timing (Welker et al. 2008). Information processing and communication between supply chain members can for the most part be standardized and formalized (Welker et al. 2008). The media richness theory indicated that the kind of information exchanged is straightforward and not ambiguous and less rich media is used.

phone calls and meetings. From the media richness theory the explanation is that this kind of information is ambiguous and thus rich and more informal media are used.

2.3.3 Environmental Uncertainty

Environmental uncertainty refers to the difficulties firms face in predicting the future due to incomplete information, changing conditions or lack of processing capacity (Germain, Claycomb, & Dröge, 2008 and Jablin & Putman, 2001). The environmental uncertainty has important implications for the strategy and structure of firms (Miller, 1991).

In this paper the environmental uncertainty is considered as the supply, demand, and technological uncertainty as used by Chen & Paulraj (2004). Supply uncertainty refers to the inspection requirements, quality and timeliness of the deliveries (Chen & Paulraj, 2004). Demand uncertainty refers to the degree sales and market trends can be monitored and predicted, resulting in variations in demand (Germain et al., 2008 and Chen & Paulraj, 2004). Technological uncertainty refers to the technological changes in a certain industry (Chen & Paulraj, 2004).

To deal with environmental uncertainty, firms have to adjust their communication. The media richness theory suggests that in uncertain circumstances, more frequent communication is needed. However, it does not indicate what media is used. Using rich media is generally more effective but less efficient in terms of time spent.

2.4. Performance of the communication

The performance of the communication is about the match between the chosen communication medium and the content of the message (Rice, 1992). Lengel & Daft (1988) investigated the selection of communication media by managers. The communication medium affects the meaning of the message. The result is that the message can be enhanced or distorted by the chosen medium (Lengel & Daft, 1988). Effective communication is when there is a match between the routine and the richness of the medium (Lengel & Daft, 1988). Efficient communication is when the communication is the least time consuming. The best performance of the communication is when the message is clear (effective) and consumes the least possible amount of time (efficient). Therefore there should be a match between the communication medium and the topic or in a broader view, the business context.

In routine communication the content of the message is simple, straightforward, rational, logical, and contains no surprises. Therefore, in routine situations, lean media are used. Formal communication filters out the emotional cues and therefore it will look like everything is under control, but small issues may become major problems (Lengel & Daft, 1988). Another mismatch is when informal (rich) media are used for routine communications. An example is to order a standardized product in a face-to-face meeting instead of by e-mail or though EDI. The order is done, but if there are a lot of these orders all the face-to-face meetings become very time consuming. Formal media are very good for communicating hard data, conclusions, statistical analyses, or official requests and directives (Lengel & Daft. 1988). Using informal communication media is better when communicating ambiguous information and rational arguments is not efficient and time consuming (Lengel & Daft, 1988).

In non-routine communications there is a greater potential of misunderstanding, and the there is often time pressure, ambiguity and surprise. Therefore, in non-routine situations rich media are used. Miss-matches can result in problems when i.e. in non-routine situations formal communication (less rich) is used. For instance a firm officially tells the buyer by an official e-mail that the delivery is suddenly delayed. Better would be a phone call telling the delivery is delayed and that a solution is talked through (i.e. another date for delivery or cancel the order). An e-mail can then be sent as an official confirmation.

2.5. Personal Influences

& Trevino, 1995). After the first publications about the media richness theory a discussion developed about the antecedents of media choice (Webster & Trevino, 1995). Webster & Trevino (1995) distinguished rational and social factors and that these factors should be added to models about media choice.

Social explanations are social influences like norms, attitudes, and behaviour and symbolic cues where the meaning of the message plays a role (Webster & Trevino, 1995). For example, a symbolic cue is that written communication is used to add formality and a face-to-face meeting is used to convey a desire for teamwork (Webster & Trevino, 1995).

2.6. Proposing a Model of Formal and Informal Communication in Supply Chain From the insights gathered from the literature review a model has been developed, which is discussed in this paragraph.

Figure 1: Proposed model of formality and business conditions

communication is very structured and routinized and low richness media like e-mail, fax, and EDI fits best.

In situations where both of the business conditions are low in complexity and low in uncertainty, there is little need for communicating. Little communication is needed for product specifications, capacity, and forecasting. Communication mainly concerns occasional orders and some more general topics. Because the complexity is low, the need to use rich media is also low. In these business conditions the communications are relative formal.

In situations where both the business conditions are high in complexity and high in uncertainty, the need for very frequent communications is high. Less emphasis is on ordering, but more on specifications, capacity, delivery times, and other product/process related problems. Ambiguity is high and due to the high uncertainty, frequent communication is needed. Communication is not structured and ad hoc. Because of the high ambiguity, fast feedback is necessary. According to Daft (1986) Information systems do not reduce ambiguity because ambiguous issues are not easily measured and communicated through impersonal systems. E-mail will do in a lot of situations but the formality of it is relative low. In order to find consensus i.e. about specifications, e-mail is not sufficient and a richer media like the telephone or face-to-face meetings are often necessary.

When the business conditions are complex and the environmental uncertainty is low, communication is mainly informal. Most communication is about the products and production processes and not so much about orders, delivery times, and capacity. Communications are little structured and routinized and the frequency of the communication is low. Communication involve rich media and immediate feedback and natural language is important.

In the next chapter, research questions and hypothesis based on this model will be formulated.

3. Research question

R.Q.: How are the business conditions related to the formal and informal communication mix of the supply chain and the performance of the communications?

Figure 2: Research Model

In this model the environmental uncertainty and business complexity are independent of each other and can either be high or low. This influences the formal and informal communication mix (formality of the communication). A well balanced formal and informal communication mix result in a high communication performance. Personal practices influences the in theoretical optimal communication mix in a negative way.

Based on the literature review and the proposed model in figure 1 the following hypotheses are suggested:

h1. In case of high environmental uncertainty and low business complexity mainly formal communication is expected;

h2. In case of high complexity and low environmental uncertainty mainly informal communication is expected;

h3. In case of high uncertainty and high complexity informal communication precedes over formal communication;

h4. In case of low uncertainty and low complexity formal communication precedes over informal communication;

4. Methodology

In order to answer the research question, five companies are researched by means of case studies. Case studies are used because the context, i.e. the business conditions, are important (Voss et al, 2002). The case studies are performed from the perspective of the supplier. The case studies will focus on two buyer-supplier relationships of each company to examine the different contexts of those buyer-supplier relations (Voss et al, 2002). Multiple case studies are used to search differences in the formal and informal communication mix regarding complexity and uncertainty, since different forms of complexity and uncertainty are unlikely to occur in a single buyer-supplier relationship.

4.1. Selection

The companies are selected from a list of the “Kamer van Koophandel” (The Dutch Chamber of Commerce that manages the trade register). Eighteen firms are selected of which 25 to 30 percent is expected to participate in this research. The selected firms are companies with manufacturing facilities that employ over 50 employees and exist for more than 10 years. These criteria are used in order to do research on longstanding relationships.

The companies are selected on the basis of their assumed complexity and uncertainty. In selecting the companies the aim is to cover all four supply chain business conditions indicated by the model (complex/certain, complex/uncertain, simple/certain and simple and uncertain), yet whether all four supply chain contexts will be addressed in this research is uncertain, since it is not possible to predict the exact complexity and uncertainty beforehand.

Five managers are questioned on two buyer-supplier relationships and the purpose, frequency and use of different communication media and personal influences.

Due to the time available to conduct this research the number of case studies is limited to five companies (and hence, ten buyer-supplier relationships). The five participating companies cover the four areas in the proposed in the model (fig1).

4.2. Procedure

the selected company is first contacted by telephone and, if interested in participating in this research, subsequently interviewed in a face to face setting.

The interview is carried out by means of an interview protocol (see appendix 1) through which the formal and informal communication mix in different supply chain contexts is determined and explained. The interview protocol consists of closed and open questions. Closed questions are designed to determine the supply chain context of a given buyer-supplier relationship (complex/certain, complex/uncertain, simple/certain and simple and uncertain) and to ascertain the formal and informal communication mix. The open questions are designed to explain the supply chain context of a given buyer-supplier relationship.

4.3. Measurements

The interview protocol is translated into variables with regard to the proposed model. The following variables are distinguished:

Complexity (based on Van Donk & Van der Vaart, 2004)

The complexity of the business conditions is determined by the distinction between complex and simple business conditions (Van der Vaart & Van Donk, 2006). The closed questions from the interview protocol are used to ascertain the Customer Order Decoupling Point (CODP), order-winner, number of product types, and the average batch size which all influence the degree of complexity of a supply chain context. The answers to these closed questions are translated into high, medium, and low complexity:

Variable Score=1 Score=2 Score=3

MTS ≤ 25 % Between 25 % and 75 % ≥ 75 %

Delivery times >3 Between 1 and 3 weeks <1

Order Winner Flexibility, quality Mixed Cost, speed

Volume-variety ratio

≤ 100 Between 100 and 1.000 ≥ 1.000

Batch sizes ≤ 100 Between 100 and 1.000 ≥ 1.000

Environmental uncertainty (based on Chen & Paulraj, 2004)

The environmental uncertainty is based upon the questionnaire of Chen & Paulraj (2004) which is incorporated in the interview protocol used for this research. This questionnaire addresses the supply, demand, and technological uncertainty and is used to determine the perceived uncertainty in a supply chain context. The closed questions are answered on a 5 point liker-scale and translated into low, medium, and high uncertainty. If agreed upon, the buyers are approached with the same questionnaire.

The average values are calculated separately for the demand, supply, and technological uncertainty. Regarding the frequency of the communication it is argued here that a high value for one of the uncertainties are not compensated by a low value for one of the others. This is because companies still have to deal with this high uncertainty. Therefore the highest value of the supply, demand, and technological uncertainty is used for the environmental uncertainty.

Formal and informal communication mix

The formal and informal communication mix is determined based on the answers of both closed and open questions.

The closed questions follow the media richness theory of Daft and Lengel (1986). The questions are used to find the frequency, ratio, and the formality the used media. The value for the formality of the communication is determined by the usage (ratio) of the different communication media multiplied by the indicated formalisation of that medium. The sum of those values indicates the formality of the communication. A value higher than 50% for the formality of the communication means that there is more formal communication than informal communication. A value below 50% means that there is more informal than formal communication.

The open questions are used to find the reason of the formality of the communication and the different aspects influencing the formal and informal communication mix.

Communication performance

The communication performance is determined by means of closed questions on a 5 point liker-scale. The questions are on the effectiveness and efficiency of the communication medium and its effect on the supply chain. The questions regarding the communication performance are composed of Daft & Lengel (1986) (effectiveness and efficiency) and more general research on the effect of communication performance on the supply chain (trust, collaboration, and shared values).

4.4. Description of the firms

Firm 1 is a relative small company that produces metal products. They transform metal plate material into a wide variety of products. They have a relative small number of buyers but a large number of different and often custom made products. Due to a flexible routing through the production facility, they are able to produce a large amount of different products. Buyers 1A and 1B highlight the great contrast of buyers in different sorts and amounts of products they purchase. Buyer 1A orders a wide variety of products and buyer 1B orders only one product. The demand of buyer 1B is rather predictable and steady compared to buyer 1A. ICT systems are not connected. Buyer 1A has recently decided to order products only from firm 1. The frequency of the communication is therefore increased for organizing the new situation. Agreements are made for frequent face-to-face meetings and these are regarded as important. Buyer 1A order much more different products and ask for have many changes in specifications compared to buyer 1B.

Firm 2 is a company that produces metal packaging products. Firm 2 produces a small variety of products in large quantities. Most products go directly to the buyers, but they also agreed to keep stock for certain buyers. Buyers 2A and 2B differ in the product-groups they order. Buyer 2A orders less frequently and there is less variation in product types they order. There is only an ICT system connection with buyer 2B. It is possible to connect to other buyers, but it is difficult. Because of this they are going to use SAP in the future.

Firm 4 produces newsprint paper in large quantities. All the produced newsprint paper is made from wastepaper. It delivers to large newspaper printing facilities and smaller printing-offices mainly for advertising. There are sometimes multiple organizations between the firm 4 and the actual buyers they deliver to. There are organizations that negotiate for multiple buyers about volumes and price. There are also end-users of newspaper who buy instead of the production facility itself. The ordering is done at another firm within the holding of which firm 4 is part of. They make use of SAP for the connection with the sales office and the buyers. Buyer 4A and 4B differ in that 4A is located in the Netherlands and 4B is located in Great Britain.

Firm 5 produces plastic products for pipes in buildings and for the infrastructure. They have a large production facility and several branches in the Netherlands. They deliver mainly from the branches to buyers but for large orders they deliver also directly from factory. The buyers differ in terms of the industry they are in. Buyer 5A is in the installation branch and buyer 5B in the infrastructure. Because both buyers run several projects, communication is frequent and with a lot of different employees. There are currently no ICT connections with both buyers, but it is possible and they are working on it.

Firm 1 Firm 2 Firm 3 Firm 4 Firm 5

Industry Metal Packaging Off-Shore Newsprint

paper Infrastructure/ construction Company size 50 200 100 265 500 Main difference between buyers Size, variation in demand

Industry Country Country Industry

ICT

connections

Usage of the communication media Formality for the communication

media

Firm 1 Firm 2 Firm 3 Firm 4 Firm 5

F ir m 1 F ir m 2 F ir m 3 F ir m 4 F ir m 5 B u y er 1 A B u y er 1 B B u y er 2 A B u y er 2 B B u y er 3 A B u y er 3 B B u y er 4 A B u y er 4 B B u y er 5 A B u y er 5 B Telephone 10% 70% 10% 30% 70% 30% 10% 20% 15% 20% 25% 30% 30% 45% 45% Email 10% 75% 50% 40% 80% 60% 80% 75% 85% 70% 60% 50% 50% 3% 3% Face-to-face 10% 100% 80% 50% 65% 5% 1% - - 5% 15% 20% 20% 2% 2% Telephone Conference - 75% 80% - - - 5% - - - - - Fax 100% 100% 100% - 100% - - - 5% 5% Mail 100% 100% 100% - 100% 5% 9% 5% 5% - - - - 45% 45%

Formality of the communication: 15% 18% 75% 76% 45% 45% 39% 39% 85% 85%

Firm CODP Delivery time Order Winner Product types Average Batch size Business Complexity 1 30% MTS 70% MTO 4 wk Flexibility 3000 500 High 2 30% MTS 70% MTO 24 hour if on stock else 1 week Speed/costs 30 <1250 Low

3 100% ETO 8 to 12 months Flexibility/Quality Unique 1 High

4 100% MTO 8 days Quality/costs 25 800.000kg Low

5 90% MTS

10% MTO

24 hour if on stock, else about two weeks

Speed/flexibility 7000 650 Low

Complexity and formal and informal communication

As shown in table 5, firms 1 and 3 have complex business conditions and 2, 4, and 5 have simple business conditions. Of these last three firms, firms 2 and 5 indicated a high formality of the communication. Firm 4 is an exception, but that will be discussed later. Both firms with complex business conditions have according to the interviewees and as expected a relative low formality of the communication. Firms 2 and 3 are the two most distinctive firms regarding complexity, however this is not the case for their formal and informal communication mix.

Information. As expected and based on the media richness theory, the kind of

information exchanged is important for the use of different communication media and subsequently the use of formal or informal communication. Three indications were found that supports this statement. First, firms 1 and 3 have both in common that engineering is needed for their orders. Therefore both companies have frequent contact with their buyers by telephone and email about engineering issues. Contrary, firms 2 and 5 have in common that a lot of communication is about orders and logistical information like delivery times.

We use formal communication when we want to put something in writing. Orders, confirmations, tenders, and everything related to

complaints. (firm 5)

ICT. ICT seems to play a special role in the formal and informal communication mix.

The first role of ICT is that it is able to take over parts of the formal communication between employees as seen by firms 2 and 4. In the relation with firm 2 and buyer 2B, the communication between employees regarding the placement of orders are replaced by vendor managed inventory (VMI). There is still communication about design and terms for the delivery, but the ordering processes are gone.

Because of the VMI at buyer 2B, there is less need to communicate about the orders.

(firm 2)

In firm 4 the orders come in through SAP systems and therefore communication about orders occur only when there is a problem. Other firms that are working on ICT connections are firm 5 and firm 3. Firm 5 is working on a system to make it possible to order online which replaces formal communication between employees. Firms 2, 4, and 5 have simple business conditions and the ICT systems are mainly used as a substitute for communication between employees. In complex business conditions ICT is likely to play another role. Firm 3 has plans for implementing ICT systems which can be connected with buyers. In this case ICT is more like a support tool for engineering and documentation. Therefore it is likely that connected ICT systems in complex business condition have less influence on the formal communication compared to ICT systems in companies with simple business conditions.

The second role of ICT is that it is also used to structure business processes. At firm 4, SAP is used as a backbone for e.g. for orders, finances, and compensations. As the interviewee of firm 4 stated:

ICT forces us to stay formal. […] Formal procedures regulated the informal communications (Firm 4)

Firm Buyer Supply uncertainty Demand uncertainty Technology uncertainty Uncertainty

(based on highest value)

1 A 1,5 2,6 2,4 Low B 1,5 1,4 1,0 Low 2 A 1,8 2,2 3,8 High B 2,3 3,4 2,6 High 3 A 2,8 4,0 4,2 High B 2,8 3,5 4,2 High 4 A 3,0 1,2 2,0 Low B 3,0 1,2 2,0 Low 5 A 1,8 3,0 2,0 Low B 2,0 2,4 2,2 Low

Table 7: Uncertainty in the supply chains

Firm Customer Frequency Rules Richness ICT connections

1 A High Low Medium None

B Low Low Low None

2 A High medium Low None

B High medium Low Yes

3 A Medium High High None (In planning)

B Low Low High None (In planning)

4 A Low Medium High Yes

B Low Medium High Yes

5 A High High Low None (In planning)

B High High Low None (In planning)

their buyers and would prefer less rich media in a structured and organized way. To a certain extent it holds, but the results are mixed.

Frequency of the communication. Of the firms with a high environmental uncertainty,

only firm 2 indicated a high frequency of the communication. The firm with a highest environmental uncertainty was firm 3 of which the frequency of the communication was medium to low with their buyers. On the other hand firm 5 has a very low environmental uncertainty, but has the highest frequency of communication with their buyers. So far, the frequency of the communication is not clearly related to the uncertainty. The frequency measured for this research is the overall frequency of the communication with the buyers instead of the frequency for each individual order. The overall frequency seems to be more related to the complexity than to uncertainty.

A better approach for measuring the frequency would be to measure the frequency of the communication for each order. It is likely that frequency for each order is at firm 3 the highest of all due to their specialised and custom made products. Firm 2 has a high frequency of communication for each order compared to the firms which are also simple, but experience more certainty in the environment. This high frequency is due to communication about changes in specifications, forecasting, and capacity. In the same view, firm 5 which has the highest overall frequency of communication, has likely the lowest frequency for each order. The specifications are clear as well as the prices for the products of firm 5. In general, the buyers of firm 5 just have to order their products.

Support for measuring frequency in terms of frequency for each order can also be found within firms 1 and 2. The buyers 1A and 1B are totally the opposite in products they buy. Buyer 1B only orders one product in different amounts. They just place an order once a week and sometimes communicate about the payments. Therefore their communication frequency for each order is very low and formal compared to buyer 1A. For buyer 1A the product specifications changes a lot and the variation in demand is much higher. More communication is needed for each order and the communication is less formal. Also firm 2 indicated a higher frequency of communication due to more uncertainty in demand. Buyer 2A had more questions related to the ordering and delivery of orders.

differently, the communication would be formal if the frequency of the communication is low for each order.

Adding certainty. Adding certainty is done by firms 2, 3, and 5. They often send

emails as confirmation for telephone calls or meetings which is not regularly done by the other firms. The main purpose was to keep things clear, so miscommunication is prevented. By preventing miscommunication, trust would increase. Firm 5 was the only company that uses letters and emails clearly for legal purposes. Another way to add certainty is applying formal reports as used in the relation between firm 3 and buyer 3B.

All the firms had a low uncertainty regarding their supply. The firms with a relative high supply uncertainty had taken precautions (certifications or enough buffers for the supplied materials). There was no evidence found that supply uncertainty was related to the formal and informal communication mix between them and their buyers.

A high technological uncertainty was found in firms 2 and 3. The interviewee indicated a higher frequency of communication with buyer 2B due to more technical changes and that keeping up with technical changes is important to stay competitive. Buyer 2B wants more on writing regarding specifications and prices compared to buyer 2A. The technological uncertainty in firm 3 is common for the industry in which they are active. Getting orders and engineering are important and there are frequent formal face-to-face meetings to talk projects through. In an early stage, engineering is used to get an order, after which the orders are engineered in more detail and translated in a design ready production. The communication around engineering processes is relative informal. However, the progress of the project are discussed to in very formal face-to-face meetings and with formal reports.

A problem encountered was that one of the firms indicated that the measured uncertainty is not entirely independent of complexity. The interviewee indicated that due to the MTS strategy they had little uncertainty.

Figure 3: Overview of the buyers in the model

Personal influences on formal and informal communication

restrictive. The rules at firm 5 were found very restrictive. Firms 5 also has the highest formality of all firms. There are two factors found which are related to the individual employees and the effects on the formal and informal communication mix.

Personal characteristics. The interviewee of firm 1 indicated that he is more

structured and routinized compared to the former account manager. His more formal approach worked better in the relation with buyer 1A. The role in the relation and previous work experience are considered important when communicating with the buyer.

Personal relations. Personal factors influencing the formality of the communication

were the personal relations with the employees of the buyers. According the interviewee from firm 3 there is more informal communication and the frequency of the communication in general is higher with people who are well known.

It may sound simple, but it also depends on the person. […] I call people if I know them better just to just ask how things are going. I sent

an email to people I don’t know that well. (firm 3)

The interviewee from firm 2 indicated that when individual employees in a buyer-supplier relationship do not know each other and the communication is more formal. Formal communication keeps thing clear and it prevents mistakes.

Other influences on formal and informal communication

Most of the firms have indicated that the customer is always in the centre and they adapt to their buyers regarding formal and informal communication. The next factors influencing the formal and informal communication mix can be described as factors related to firms adapting to the customer.

Culture. Effects of culture were found in firms 1, 3, and 4. Cultural differences are

There is also less miscommunication due to differences in culture and language. Firm 4 its own internal culture was also subject to influences of their previous owners. The new owner is relative informal, but has also introduced new rules and guidelines for internal and external communication.

Language. As noted above, language can cause miscommunications. The interviewee

of firm 3 indicated that email was more used because it was difficult for employees of the buyer to express themselves in English.

Relationship stage. In the previous paragraph was already noted that on an individual

level employees that do not know each other use more formal communication. At a higher level, interviewee from firm 3 works in an early stage of new buyer-supplier relations, were communication is unplanned and there are a lot of changes. In this stage, agreements are made about planning, targets and needed documents. Firm 1 also indicated a higher frequency of informal communication because they had to adapt to changes in the relation.

Firm Customer Complexity Uncertainty Personal Influence

Formality Performance of the Communications

1 A High Low High Low Very good

B High Low High Low Very good

2 A Low High Low High Good

B Low High Low High Good

3 A High High Medium Medium Good

B High High High Medium Very good

4 A Low Low Low Medium Very good

B Low Low Low Medium Good

5 A Low Low Low High Good

B Low Low Low High Good

Table 9 : Overview of the results Performance of the communication

The performance of the communication with all buyers was rated good till very good. That they are all rated at least good is probably because most the interviewees indicated that the firms had a lot of influence on communication with their buyers.

had the most influence on the formality of the communication. The opposite was found in the firms with mainly formal communication. Employees had little influence on the formality of the communication and the performance of the communication was rated lower (although still good). An example of low influence on formal communication was found in firm 5:

The employees of our firm have no choices regarding formal communication. Informal communication is up to the employees.

(firm 5)

High performance of the communication is likely because individual employees are more flexible with informal communication. Informal communication increases trust and mutual understanding. An example of a relative informal relation in firm 1:

We are both very informal firms. When I am there I don’t feel like a guest and I don’t get a visitors pass. Only my role is different. […] Being informal doesn’t restrict me to be pragmatic. On the contrary, it helps us to find a solution. We both have a problem in stead of you have a problem. [..] There is no basis to find a solution if there is no trust.

(firm 1)

High Uncertainty, Low Complexity

Information

Orders, delivery times, price

Communication

- Mainly formal communication. - An email is often sent as confirmation - Very high usage of email

- Communications still formal when ICT-systems are connected

High Uncertainty, High Complexity

Information

Design, specifications, requirements, formal reports

Communication

- Slightly more informal than formal. - Reports and written confirmations come after informal communication with rich media.

- High usage of face-to-face meetings - ICT systems are not connected Low Uncertainty, Low Complexity

Information Mainly Orders

Communication

- Mainly formal communication - ICT can take over a major part of the ordering process and thus formal communication between employees

Low Uncertainty, High Complexity

Information

Design, specifications, production planning

Communication - Mainly informal

- High usage of email and face-to-face meetings

- ICT systems are not connected

L o w U n ce rt ai n ty H ig h

6. Conclusion

The media richness theory suggested that when business conditions have a low complexity, communication is mainly formal because there is little ambiguous information. In simple business conditions the information exchanged is important. The products are well known and the topics of the communication are mainly about orders, delivery times, and price. Communication between the firms and the buyers is structured, routinized and thus mainly formal. In complex business conditions, communication between the firms and their buyers is mainly informal. Information exchanged is often about the products itself (design, requirements, and specifications) or the production planning. Information is therefore ambiguous and rich media have been used to communicate. These rich media are not used very structured and routinized and the communication is mainly informal.

The relationship between environmental uncertainty and the formal and informal communication mix is not clear. Increased frequency and adding certainty are found to be related with formal and informal communication. Increased frequency of the communication generally resulted in increased formality. However, it was not clearly related with the uncertainty but more with the complexity. A high overall frequency is more related to low complexity. A better approach regarding frequency would be to view the frequency in terms of frequency for each order. A higher frequency for each order indicates a higher uncertainty and resulted in more informal communication. Formality to the communication was also added in the uncertain environments. Adding formality was done by sending email after a meeting or phone call and by using formal reports.

The performance of the communication was rated good with all companies. The firms indicated that the customer is always in the centre of to their policy and that they have a lot of influence on the communications with the buyers. Another reason for the good performance of the communication might be that buyers would move to another supplier if the communication is not satisfactory enough. Interestingly, a very high performance of the communication was registered in firms which used mainly informal communication.

Thus, simple and complex, and certain and uncertain business conditions are related to the formal and informal communication mix in different ways and do influence the performance of the communications. Simple business conditions increase the formality of the communication mix; complex business conditions decrease the formality of the communication mix. Environmental uncertainty does not result in a high frequency of the communications between buyer and supplier, but a high overall frequency increases formality. Employees try to create more certainty by adding formal communication (e.g. formal reports, confirmation by email); The formal and informal communication mix seems to be influenced the most by simple or complex business conditions. Personal influences were the strongest when the communication was informal and as a result the performance was rated best.

6.1. Limitations

As in many researches, there are also limitations to this study. First, this research is conducted by means of a restricted number of case studies. The results are dependant on chosen firms and although selected carefully, it remains uncertain if they represent a broader range of buyer-supplier relationships.

Second, the firms are Dutch firms and they are subject to Dutch culture. According Simchi-Levi et al (2008), communication is subject to local culture. Evidence of cultural issues was also found in the analysis.

Third, only one employee was questioned per participating firm. Employees are not fully objective but subject to their own experiences and perspective (Emans, 2002). Their experiences and perspectives might not reflect the general experiences and opinions in particular regarding experienced uncertainty and performance of the communication.

Fourth, interviewees were questioned about their own work, therefore it is presumably likely that they have highlighted the positive aspects of their work.

Fifth, available time for the interviews was limited, therefore not all questions that were prepared were also asked. Additionally, the time available to question more in depth was not always there after some extensive answers of the interviewee.

6.2. Further research

As noted in the discussion it is likely that the experienced environmental uncertainty is subject to the firm’s strategy. Companies are looking for strategies to reduce uncertainty by using a specific strategy, therefore three items should be considered for further research regarding uncertainty: first, one could use objective instead of subjective data for measuring uncertainty; secondly, further research could also focus on the strategy of the firm and the effect on the formal and informal communication mix; finally, the frequency of the communication could be measured by frequency for each order.

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Appendix 1: Interview protocol

Informatie geïnterviewde (+/- 2 min)

Naam: ... Functie:... Leeftijd: ... Telefoonnummer: ... E-mail: ... Werkzame jaren binnen het bedrijf: ... Opleiding/werkervaring: ...

Algemene bedrijfsinformatie (+/- 5 min)

Om een idee te krijgen over de omgeving, waarin uw bedrijf zich bevindt, willen wij u een paar vragen stellen met betrekking tot uw bedrijf, producten en de markt waarin uw bedrijf zich begeeft. (Het gaat om order van grootte, niet de precieze cijfers.)

Volume: ... Omzet: ... Aantal werknemers: ... Aantal afnemers: ... Aantal orders/afroepen per: ... (dag/week/jaar) Aantal producttypes: ... Seriegrootte:

Belangrijkste productieproces: ... Klantorderontkoppelpunt:

... % wordt op voorraad geproduceerd ... % wordt per klantenorder geproduceerd

... % wordt ontworpen voor de klant ... % wordt geassembleerd voor de klant

Indicatie van de levertijd: ...(uur/dag/week/jaar) Belangrijkste producten: ... Belangrijkste markten: ... Maximale bezettingsgraad: ... Bezettingsgraad op dit moment:... Waarom bestelt men bij uw bedrijf? (bv. kosten/flexibiliteit/kwaliteit)

...

Eigenschappen per klantrelatie (2x) (totaal +/- 10min)

Wij willen het nu hebben over twee klantrelaties, die belangrijk voor u zijn. Onze voorkeur gaat uit naar twee klantrelaties, die beiden belangrijk voor uw bedrijf zijn, maar wel zo veel mogelijk verschillen. Er worden nu een aantal vragen gesteld om een beeld te krijgen van de specifieke klantrelatie. (Het gaat om order van grootte, niet de precieze cijfers.)

Afnemer A:

Naam van de afnemer: ... Percentage van totaal volume:...% Percentage van totale omzet:...% Percentage van totale producttypen: ...% Percentage van het aantal orders: ...% Levenscyclus producten: ... (uren/dagen/weken/jaren) Ordercyclus: ... (uren/dagen/weken/jaren) Hoe lang bestaat deze relatie:... jaar

Klantorderontkoppelpunt:

... % wordt op voorraad geproduceerd ... % wordt per klantenorder geproduceerd

... % wordt geassembleerd voor de klant Hoe lang slaat u producten voor deze klant op?

... ... Hoe lang slaat uw klant uw producten op?

... ... Hoeveel procent van de voor deze afnemer geproduceerde producten kan niet meer verkocht worden? (niet houdbaar, oude versie e.d.)

... ... Aantal snellopers: ... Vraagonzekerheid: ... (low/medium/high) In welke producten past deze afnemer uw producten toe?

... ...

Onzekerheid in de klantrelatie (2x) (totaal +/- 15 min)

Er wordt nu twee keer een serie vragen gesteld over de onzekerheid, die u ervaart per klantrelatie.

Onzekerheid in klantrelatie A

Onzekerheid van toeleveranciers voor de producten van afnemer A. Het gaat specifiek over de toeleveranciers voor klantrelatie A. Helemaal niet mee eens helemaal mee eens 1 _{De toeleveranciers voldoen steeds aan onze eisen.} 1 2 3 4 5 2 De toeleveranciers produceren materiaal van constante

kwaliteit. 1 2 3 4 5

3 Wij doen uitgebreide inspectie bij de binnenkomst van

kritisch materiaal. 1 2 3 4 5

4 Wij moeten veel net binnengekomen kritisch materiaal

afkeuren bij inspectie. 1 2 3 4 5

Onzekerheid van de vraag van afnemer A Zeer gering Zeer groot 1 De totale hoeveelheid producten die afnemer A

afneemt, schommelt aanzienlijk van week tot week. 1 2 3 4 5 2 De mix van afgenomen producten varieert van week tot

week. 1 2 3 4 5

3 Wij houden producten voor afnemer A op voorraad om

schommelende afnamehoeveelheden op te vangen. 1 2 3 4 5 4 De totale afnamehoeveelheid van afnemer A is