Effective Governance of Buyer-Supplier Relationships

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Effective Governance of Buyer-Supplier

Relationships

Master Thesis Supply Chain Management Final Version, 15th_{August 2015}

University of Groningen

Faculty of Economics and Business

Student: A.C.W. Bot

Student Number: S1765175

Supervisor: prof. dr. ir. C.T.B. Ahaus

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Abstract

Governance in a buyer-supplier relationship is the management of the relationship between buyer and supplier. Within the buyer-supplier relationship two types of governance relationships can be identified, formal and informal. In literature these formal and informal governance relationships are described as the concepts of contractual and relational governance. The motivation for this research is the contradiction in literature about two insights on the interplay between contractual and relational governance. The contradiction is that both concepts complement each other as well that they are a causal reaction to one another. The objective of this research is to assess the most effective way of applying governance in a buyer-supplier relationship. Variables and factors examined for their influence are interdependence, power, trust, and financial incentives. This research is conducted in a manufacturing setting in the metal working industry.

The research is conducted with the use of a multiple-case study, where four companies are visited to obtain the data needed for this research. The data is collected by conducting semi-structured interviews followed by a document study. The data is then analysed using a within-case analysis and a cross-case analysis to identify patterns and discrepancies. The results of the analysis are used to discuss and compare the findings with existing literature.

The results show that the relational governance is important in cases of high interdependence in the buyer-supplier relationship. Trust based on product quality and lead time reliability is important in the relational governance. Contractual governance is merely based on standardised contracts which are used throughout the supply chain. Also financial incentives do not or play a minor role in the contractual governance because of low order quantities or project based orders with competitive prices.

The results lead to the conclusion that in the metal working industry the relational governance is very important and that the contractual governance complements the relational governance for administrational purposes. In the buyer-supplier relationship, interdependence has a large amount of influence on the relational governance and not much on the contractual governance, as the contracts used are standardized. Therefore it is important to invest in a good relational governance and learn from each other.

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Preface

In writing this preface my master thesis has almost come to an end. This thesis challenged me to use my knowledge gained on supply chain management. Though it was sometimes quite hard, it also made me realize what I have learned over the last years.

In this preface I would also like to express my gratitude to the people who helped me with this thesis. First of all I would like to thank my fellow students for the feedback and support they gave me and for the good times we had during our study.

I want to thank my supervisor professor Ahaus for being supportive, giving me a repair chance, being patient with me and providing feedback during the time of writing this thesis. Thanks to this I was able to complete and stay motivated for this thesis. Also I want to thank my co-supervisor professor Slomp for providing helpful feedback on the research proposal and the preliminary final version of this thesis.

A special thanks goes to Mr. Nijmeijer at the NEVAT-group for providing the companies to conduct this research and to all the interviewees at the companies who were so generous to spend some time in their busy schedules to participate in this research and to answer my questions.

Thanks to my big sister Saskia Bot and her partner Raymond van Sabben for being critical and helping me edit my thesis into a more readable format.

Last but not least I would like to thank my parents for their relentless support during my study and for being so kind to take me back into their house while finishing my master thesis after living some years in the city of Groningen.

Arjen Bot

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1. Introduction

Within the field of supply chain management the buyer-supplier relationship is important because an effective relationship between buyer and supplier influences the performance of companies (Carr & Pearson, 1999). In a buyer-supplier relationship two types of governances are used to manage the relationship, a formal and informal one. Relational governance can be seen as the informal relationship between the buyer and supplier, whereas the contractual governance is a more formal type of relationship (Cao & Lumineau, 2015). The objective of this research is to provide insight on how relational and contractual governance can be effective in a buyer-supplier relationship.

Current research states that there is an actual contradiction between two insights on the interplay between relational and contractual governance. Lumineau (2015) states that the concepts complement each other in the buyer-supplier relationship while other research states that contractual governance is a causal reaction to less good relational governance (Zheng, Roehrich, & Lewis, 2008). Current literature mentioning the governance types use trust and interdependence as important variables in a buyer-supplier relationship (Ireland & Webb, 2007). Trust is an important variable in contract management, both parties in the relationship need to have mutual interest to each other, a part of this is the specific asset management (capacity and personnel) and investment in the relationship (Handfield & Bechtel, 2002). The level of interdependence determines the power balance and dependency that exists in the relationship (Caniëls & Gelderman, 2005). The use of financial incentives, like for example revenue sharing, may provide an increase in performance and competitive advantages for both parties in the relationship and therefore increases trust (Jap, 2001).

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With the literature showing gaps in the development of buyer-supplier relationships and the interplay between the governances, a variety of questions can be asked to fill these gaps. By answering these questions managers can benefit from new knowledge on the subject of buyer-supplier relationships. The main research question for this research is:

‘’How can relational and contractual governance be effective in a buyer-supplier relationship?’’. The sub-questions used to answer the main research question are:

- What is the influence of interdependence and power on relational and contractual governance? - How can trust influence the relational governance in the buyer-supplier relationship?

- What is the role of financial incentives in the buyer-supplier relationship?

As current literature is insufficient to answer these questions a multiple-case study is conducted. For this purpose four companies are visited, these companies have different backgrounds in machine systems, machine parts, and plate processing. Interviews are conducted in order to collect the data needed for this research. The multiple-case study provides the data to answer the questions in this research on how companies in the buyer-supplier relationship make use of contractual and relational governance and how they manage trust and the balance of power and interdependence in the buyer-supplier relationship. Furthermore a document study is conducted to validate the data of the interviews.

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2. Theoretical Framework

The theoretical framework is used to explain the different theories and concepts used for this research. For this research it is important to have a clear overview of the relationship types between buyer and supplier. Furthermore the concepts of trust, interdependence, power, financial incentives and performance are studied. Finally a conceptual model is constructed.

In order to find the relevant literature for this study, different keywords are used. The key words used to find relevant literature for this research are: buyer-supplier, contractual governance, relational governance, arm’s length contractual relation, obligational contractual relation, financial incentives, contracts, trust, interdependence, and power.

2.1 Governance of relational/contractual relationships

There are different relevant concepts used for contracting. Relational and contractual governance in a buyer-supplier relationship are often used in literature to describe the governance type used in the relationship. Relational governance can be seen as the social relationship between the buyer and supplier whereas the contractual governance can be seen as the formal contractual type of relationship (Cao & Lumineau, 2015).

Two other concepts often used in literature are ACR and OCR. ACR is seen as the more contractual relationship type without further commitments besides the appointments in the contract. OCR is seen as the more social relationship type between buyer and supplier and is based on trust and dependency (Sako, 1992). Although they sound similar to relational and contractual governance, they are used with slightly different definitions. As the concepts of relational/OCR and contractual/ACR show a large amount of overlap with each other, the concepts of relational and contractual governance will be used for this research.

The research from Cao and Lumineau (2015) is an extensive background study about formal and informal levels of relationships, it concludes that relational governance and contractual governance complement each other in the buyer-supplier relationship (Poppo & Zenger, 2002).

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2.2 Trust

Trust plays a big role in relational and contractual governances in buyer-supplier relationships. In literature about relationship governance trust is defined as the believe of the involved contractual parties that they both tell the truth and will help each other out in difficult situations (Zaheer, McEvily, & Perrone, 1998). Other research shows that trust is solely involved in relational governance (Lee & Cavusgil, 2006). In this research trust will be seen as a factor of relational governance, because trust is seen as a social aspect in the buyer-supplier relationship and has no influence on the contractual governance (Zheng et al., 2008).

2.3 Interdependence and power in the relationship

Interdependence in a relationship is the amount of dependencies a buyer and supplier have. In these dependencies power can be used to influence managerial choices or there is a power balance created in the buyer-supplier relationship through the interplay between relational and contractual governance. This power balance ensures that influence from buyer and supplier on each other is ruled out (Krause, Handfield, & Tyler, 2007; Liu, Luo, & Liu, 2009).

Recent research on the power function shows that there are two important types of power in a buyer-supplier relationship based on balance between the buyer and the buyer-supplier in the relationship (Caniëls & Gelderman, 2007), namely total power and relative power. The level of interdependence in the buyer-supplier relationship determines if a relationship has a partner with total power which influences choices that are made or there is relative power which can be seen as an asymmetry in the interdependence between buyer and supplier. For example, this asymmetry can be seen as the dependency of the buyer on the supplier, but the supplier is not solely dependent on the buyer. Caniëls & Gelderman (2007) state that research is scarce on the subject of power and interdependence in a buyer-supplier relationship and their effect on relational and contractual governance.

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High Profit Impact Low Leverage items Exploitation of purchasing power Strategic items

Diversify, balance and exploit (minimize risk)

Non critical items

Efficient processing (catalogue shopping)

Bottleneck items

Volume assurance (insist on safety stock) Low Supply risk High Table 2.1 - Kraljic (1983) purchasing portfolio model

2.4 Financial incentives

Financial incentives can be seen as contract mechanisms used in a buyer-supplier relationship, they are meant to create a performance gain for both parties in the relationship.

Three types of contracts are commonly treated in literature about financial incentives in a buyer-supplier relationship, these contracts are a wholesale price contract, a buyback contract and the shared revenue contract (Katok & Wu, 2009).

Wholesale contracts can be seen as basic contracts with rewarding and coercive incentives implied to the contracts (El Ouardighi, 2014). Wholesale contracts are often one-sided contracts where the supplier sells a product with a margin and the buyer also puts on a margin when selling the (finished) product and a double margin is added to the product (Perakis & Roels, 2007). In the wholesale contract setting every party in the supply chain makes decisions solely for their own interest.

Buyback contracts in a supply chain allow the buyer to return unsold goods to the supplier upon an agreed price (Arshinder, Kanda, & Deshmukh, 2008). The disadvantage of the buyback contract is that overproduction may occur at the supplier which will have a negative effect of the performance outcome on both parties in the relationship. These kind of contracts are often used in catalogued products which are bound to a season.

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The shared revenue contract is a helpful solution for an optimal performance gain throughout the supply chain. Buyer and supplier make decisions together on order quantity and the percentage of revenue shared with the supplier, with this contract type between the parties costs are kept low and each product sold has more revenue for both parties than costs (Cachon & Lariviere, 2005). A successful example of revenue sharing is the Blockbuster video rental service (Cachon & Lariviere, 2001), instead of paying per video cassette, Blockbuster payed the wholesale price and a share of the revenue in return and more video cassettes could be purchased for more availability which led to an increase in market share.

Revenue sharing can also be used by companies to improve the level of innovation, quality and performance of products. Only revenue sharing is not sufficient for some relationships because the parties in these relationships are only innovating and thus have no revenue yet. For these kind of companies the concept of revenue sharing is extended to innovation sharing and investment sharing, the main principles stay the same but an amount of the revenue is now invested in quality or product improvement/innovation (Bhaskaran & Krishnan, 2009).

The literature about financial incentives shows that these new types of contracts may lead to a better performance in the buyer-supplier relationship. A trend has been noticed that companies tend to go back to more basic type of contracts where coercive and reward based agreements are included in contrast to more complex contracts discussed above (Zheng et al., 2008).

Based on the theory discussed above the interplay between relational and contractual governance in a buyer-supplier relationship is studied and how financial incentives are involved.

2.5 Performance

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2.6 Conceptual model

Based on literature used for this research a conceptual model is constructed. The model shows the effectiveness of relational and contractual governance in a buyer supplier relationship influenced by interdependence. The conceptual model can be seen as an extension of the model used in the article of Cao & Lumineau (2015), this extension is the adding of the moderating factor of financial incentives and the variables of power and trust to interdependence and relational governance.

Figure 2.1 – Conceptual model, showing scope of the research

Different relations between the variables and factors are shown, a short explanation follows how these relations between variables and factors are established.

Interdependence can be seen as the variable influencing both types of governances.

Financial incentives can be seen as a moderating factor between interdependence and contractual governance.

As power is highly related to the interdependence in a buyer-supplier relationship it will be used as a factor of interdependence.

Trust is seen as a social aspect related to relational governance.

Performance is seen as an outcome of relational and contractual governance.

The intention of this research was to measure the effect on performance as well, but due to lack of data on this variable, performance is left out and the research is focussed on the interplay between relational and contractual governance influenced by interdependence.

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3. Methodology

To answer the main research question a multiple-case study approach is used to conduct this research. A multiple-case study obtains data from multiple cases that can be compared to each other. The use of a multiple-case study brings a significant amount of data that can be used to identify patterns and discrepancies and leads to data from different contexts which can lead to a more generalizable research (Fynes & Voss, 2002).

The data is collected using semi-structured interviews followed by a document study. The data from the interviews is collected by visiting companies and having face-to-face meetings with employees. These interviews provide rich data that is derived from the contextual environment where the companies operate in. After the interviews an analysis of contract documents of the same four companies is conducted. Interviews followed by a document study deplete the possibility of biases in the research by validating information gathered from the interviews. This kind of research is promoted by literature based on case study research (Sousa & Voss, 2008).

With the obtained data a within-case analysis and a cross-case analysis are done. The within-case analysis shows the results per case whereas the cross-case analysis seeks for different patterns by comparing the cases. The interviews are focused on the purchase of strategic items, because these are important and have the largest influence on the profit impact and the supply risk (Kraljic, 1983), and therefore on the company and their governance.

3.1 Sample selection

The companies for the case study are provided by the NEVAT-group which is an industry association that connects different metal processing companies with a buyer-supplier setting to each other. To collect the data for this research twelve companies are selected by the NEVAT-group which are able to provide the necessary data. From this database of twelve companies four companies are selected for further research. These four companies are considered as buying companies. The choice for these companies is based on the following properties:

1. Different types of industry groups 2. Number of employees

3. Diversity in relational and contractual governance (expected)

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Three of the companies used for this research have an amount of employees between 80 and 120 and one company has over 200 employees. The aim was to have approximately the same number of employees in each company to get a fair comparison, but during the research one of the companies proved to be bigger.

The main motive for this sample selection is the even distribution of an expected focus on relational or contractual governance by the companies (Yin, 2011). This choice is based on preliminary data provided by the NEVAT-group. The factors influencing this choice for an expected governance type are the degree of customization versus non-customization in the process. If a product is custom build, a lot of contact is needed between buyer and supplier as there is more risk, as non-customization needs less contact (Kraljic, 1983). Other factors influencing this choice for an expected governance type are: industry group, national or international focus, and complexity of products

At these companies the interviews are held with the general manager and when possible also with the purchasing manager. The general manager is chosen because of the overall knowledge of the company and the market. The purchasing manager is interviewed because of the responsibility for maintaining contracts with the suppliers. Because of the confidential nature of the data, the companies are anonymized in this research.

The following table shows the different properties of the companies used in this research. Case/Properties Date of Interview Industry group Number of employees Expected governance type Interviewee Case A 12-05-2015 Plate processing 80-120 Contractual General Manager & Purchasing Manager Case B 19-05-2015 Machine Systems 80-120 Relational General Manager Case C 22-05-2015 Plate Processing 80-120 Contractual General Manager Case D 04-06-2015 Machine parts 200+ Relational General Manager

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3.2 Data collection

Data for this research is collected with two different methods, semi-structured interviews and a document study.

The semi-structured interviews provide reliable and extensive data on the type of governance used by the companies, how trust is perceived, how relational aspects and the use of power play a role in a specific buyer-supplier relationship. The company had to pick a supplier of a strategic item to answer the questions of the interview based on that relation and afterwards the differences with routine items in comparison to strategic items were asked. The template of the interview can be found in appendix A (in Dutch).

The document study is an additional study, in which the contracts used by the companies are studied to assess if the contracts show similar results as the interviews. The analysis of the contracts also elaborates on the different types of governance and the presence of financial incentives, see appendix B.

By using different methods to gain data, through semi-structured interviews and document study, triangulation is possible, where the outcomes confirm each other. By comparing the two types of data in one research raises the validity of the research (Miles & Huberman, 1984).

3.3 Data analysis

The variables trust, interdependence, and power are used as the descriptive codes to research the interplay between relational and contractual governance. These descriptive codes are translated into interpretive codes using quotes derived from the interviews to be more applicable to the context (Miles & Huberman, 1984). Table 3.2 shows the interpretive codes.

The interviews are conducted using the descriptive codes. The operationalisations per descriptive codes are given below.

Trust:

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Interpersonal trust is operationalised as follows: the way of negotiation between contact persons, the contact person’s performance, and mutual interest of the contact persons, and issues which happened in the past.

Interdependence:

Interdependence relates to the level of dependency between buyer and supplier and how different actions of the company are affecting the buyer or supplier, this also determines how much power a company uses to influence the other party (Capaldo & Giannoccaro, 2015). Interdependence is operationalised as the possibility that a company can be replaced by another company if asset investments are made in the relationship and the production line is customized to products from a small amount of suppliers (Heide & John, 1988).

Power:

Power can be seen as the ability to influence choices made in the buyer-supplier relationship, which can be defined as a rewarding and a coercive factor (Zhao, Huo, Flynn, & Yeung, 2008). The power of rewarding can be seen as a reward in the future, for example collaboration in a new project, whereas coercive actions can be seen as putting pressure on the other company in the relationship. Therefore power is operationalised as the use of power in the buyer-supplier relationship, level of different kind of powers, and the use of power to solve issues between the companies.

Financial incentives:

Financial incentives can be seen as both coercive and rewarding incentives taken into account in the contractual governance. Financial incentives are therefore used by assessing their influence on the contractual governance of the buyer-supplier relationship.

3.4 Coding

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Descriptive code ‘’Quotes’’ Interpretive code

Inter-organizational/ personal trust

‘’Quality and reliability are the two most important factors to order, before price’’

Quality/Reliability driven trust

‘’If prices are not market based, something is not right’’

Financially driven trust

‘’If the buyer doesn’t sell anything to a customer, the supplier also doesn’t sell’’

Mutual interests

‘’If needed open calculations are used during negotiations, but not all suppliers are open’’

Information sharing

Interdependence ‘’You can buy everything, there is always

another supplier, but you need to invest in quality and reliability’’

Substitutability

Power ‘’If a supplier delivers good quality and has a

high reliability, we reward them with supplying our next project’’

Reward based actions

‘’If you madly exceed in something bad, the possibility is great to be placed on a black list’’

Coercive based actions

Contractual Governance

‘’Dutch law prevents safeguarding, if a supplier, who does not comply to an agreement, but does his best, you must wait’’

Formal way of safeguarding

Relational Governance

‘’Our company and the supplier are business-partners’’

‘’We have a good name so the supplier also wants to be part of that’’

Mutual Commitment

Table 3.2 – Interpretive coding based on quotes from interviews

The contractual and relational governance codes are not used in the interviews as they are included in the other codes on trust and power. The quotes given are an operationalization of these concepts used in the research, related to the contexts of the different cases and therefore these concepts are marked as grey in the table above.

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3.5 Document study template

Document study or document analysis is often referred to as content analysis in literature (Sousa & Voss, 2008). Content analysis is used to gain data from textual content and compare it with data or theories gathered beforehand. For this research a summative approach is used. With a summative approach the data from the interviews is based on the context of the interviews (Hsieh & Shannon, 2005). Results from the within-case analysis are compared to outcomes of the document studies from the cases to see if the results are valid or that companies operate differently than they mentioned about the interplay.

The objective of this content analysis is to assess if the strategy used by companies differs in variables and factors on how the governances in the buyer-supplier relationship are managed. Also the use of the document study template is to identify the financial incentives used and how this can be used to influence the governances.

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4. Results

The results section contains the outcomes of the analysis of the conducted interviews. The results section starts with the within-case analysis in which the outcomes of each interview are given. After the within case analysis a summary is given in the form of a table where high and low scores are given to each interpretive code. The cross-case analysis uses clusters to recognize patterns which are used to formulate propositions (Miles & Huberman, 1984).

4.1 Within-case analysis

The main outcomes from the interviews are shown per case including the results of the document study. These results are arranged using the descriptive codes because the interviews were conducted in that order. After that the results from the document study are used for validating the data from the interviews. In the summary the interpretive codes are used based on the descriptive codes.

4.1.1 Case A

Inter-organizational trust

High inter-organizational trust is needed between the buyer and the supplier of the strategic item. In this case the quality and reliability of the strategic item are the most important which leads to gaining trust, where quality is the product quality and reliability the lead time. In this case, price for strategic items is often competitive in the market that is why price is less important.

Interpersonal trust

Communication between contact persons of the companies is solely based on the performance aspects of the quality and reliability. The buying company is more dependent on the supplier than vice versa, for this reason there is no need for the supplier to share information.

Interdependence

The buying company in this case is more dependent on the supplier than vice versa, because the strategic item can only be delivered by the supplier with the required quality and reliability. In this case a change of supplier will cost time and money, which has a big influence on the choices that are made. Power

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Coercive and reward based actions are not used, also financial incentives are not used in this case.

4.1.2 Case B

In this case reliability seems to be important because of deadlines, however price is the motivator for choosing a supplier. Suppliers make an offer to be part of the project, but if the offer does not comply it gets declined. This shows that price is an important element in assessing the offer of suppliers. Interpersonal trust

The communication between contact persons is good and open, but information sharing and mutual interest are not really important in this case. Information needed is provided, like open calculations. If negotiations are not going well, there are still other suppliers available.

Interdependence

There is high substitutability in this case, as the general manager stated: ‘’on a scale it would be 100%’’. Which shows that the buying company is not dependent.

However, in special situations like when customized parts are needed and less suppliers are able to deliver this strategic item, there is some investment in these suppliers to bring them to an acceptable level of quality and reliability. So there is some level of dependency. In these cases also more information is shared on how to produce components. As these special situations do not often occur the relevant level of dependence is low.

Power

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4.1.3 Case C

Trust based on quality and reliability is important in this case. The supplying company is getting more orders and therefore reliability in delivery is becoming a larger problem. The price of the strategic item bought is less important, because also in this case, the prices are competitive. The buyer and supplier use contracts about safety stock in this situation, so all demand can be met by the supplier. The supplier agreed to these agreements because of the high trust between the companies.

Trust between the contact persons is very high, because buyer and supplier are strategic partners because they work together to improve and enhance the supply chain and therefore have large mutual interests and are open in information sharing.

Both parties are trying to minimalize risk in the relationship by working together to achieve the least risk on a project.

Interdependence

For the strategic items and related specific processes the substitutability is low.

A switch to a different supplier, is possible, but this may lead to lower quality and reliability. So it will cost time and money to realize an acceptable level of quality and reliability from this new supplier. Power

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4.1.4 Case D

Reliability and quality are more important compared to the financial aspect in this case. Because the buying company has large customers and a tight schedule.

Because of the large customers, suppliers are willing to agree to the requirements needed for the projects, so they can promote themselves and are therefore trustworthy.

The communication between the contact persons of the buying and supplying company is good. As the supplying companies want to work on projects in this case there is a high level of mutual interest and they can put such projects on their portfolio.

There is also a high level of information sharing as plans are shared before the project is assigned to the buying company by the end customer in order to see if it is possible to comply with the requirements of the project.

Interdependence

The substitutability is high in this case, but the buying company prefers to work with suppliers that are known to be reliable and deliver good quality. Switching to a new supplier will cost time and money to bring this supplier to an acceptable level.

Power

The power balance is on the side of the buyer in case of unique projects and order quantity that could be assigned to them by large customers. The supplier has some power because they have a good reputation in quality and reliability, but this power is outweighed against the power the buying company has.

When working on a project that is assigned by the end customer to the buyer and supplier, the power distribution is in balance as nothing can be changed after that and in case of issues these need to be resolved with the customer.

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4.1.5 Document study outcome

The document study per case validates the data derived from the interviews conducted. The interviews show that financial incentives are slightly used in situations where large quantities are ordered which may change during the contract period or not at all.

The document study also shows that most contracts used are the same for strategic items. The purpose of the contracts is a formal way to agree on volumes, reliability, payments, secrecy, and length of the contract. Summarized, most are a basic contract as discussed in the theoretical background on different types of contracts available.

Literature also mentions that new types of contracts, for example revenue sharing, could be an advantage for these companies. The companies themselves do not see the advantage of such contracts because they assume that these contracts are more usable higher up in supply chains where components are merged instead of companies that manufacture these components. Some companies use discounts on volume and quantity flexibility in their contracts, but they prefer to avoid this to agree on a lower price for an order.

4.1.6 Within-case summary

In this recapitulation of the outcomes of the interviews and document study, the results are translated from descriptive codes into interpretive codes. The codes are given a score (high, low) per case which then can be used in the cross-case analysis. The table below shows the scores given to the each.

Descriptive code Interpretive code Case A Case B Case C Case D

Inter-organizational /personal trust

Quality/Reliable driven trust

High Low High High

Financially driven trust

Low High Low Low

Mutual interests Low Low High High

Information sharing

Low Low High High

Interdependence Substitutability Low High Low High

Power

Coercive and

reward based

actions

Low Low Low High

Financial Incentives

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Descriptive code Interpretive code Case A Case B Case C Case D Contractual

governance

Formal way for safeguarding

Low Low Low Low

Relational governance Mutual Commitment

Low High High Low

Table 4.1 – Interpretive codes ranked per case

The contractual and relational governance shown in the table are not used in the interviews and document study, these are marked grey in the table. The concept of contractual governance and thus formal way for safeguarding is based on the coercive/reward based actions and financial incentives. Relational governance and mutual commitment are based on trust, mutual interests, and information sharing. The contractual and relational governance are used in the cross-case analysis.

4.2 Cross-case analysis

The cross-case analysis consists of three parts, clustering, pattern analysis and formulating propositions. Clusters are made to simplify the identification of patterns found between the cases. Clusters are made based on variables and factors that can be grouped together or are influenced in the same way. Patterns identified from these clusters are analysed and explained. Following the patterns found, propositions will be formulated which help in answering the research questions.

4.2.1 Clustering, pattern analysing, propositions

The clusters are based on relational and contractual governance. The interpretive codes are based on relational and contractual governance and are therefore clustered in this way. Substitutability shows an even distribution between high and low between the cases and is therefore used in both clusters, also because interdependence may be influencing both relational and contractual governance. Case A and C are compared to each other based on low substitutability and case B and D on high substitutability. After that the outcomes from (A+C) and (B+D) are compared to each other. The clusters, patterns, and propositions are given below:

Cluster A (relational governance)

- Substitutability

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The pattern found in this cluster shows us that substitutability has different effects on mutual interest and information sharing, because we find both high and low scores for different levels of substitutability. The differences in this pattern can be explained as the relative substitutability in the buyer-supplier relationship. For example, the buying company is dependent on the supplier, but the supplier is not dependent on the buyer. Case A and C both have low substitutability, in case A the low mutual interests and information sharing which can be explained by the dependence of the supplier in comparison to case C where the supplier is more dependent and therefore has higher mutual interests. The same effect is seen between case B and D, but here the scores of substitutability were high. The following proposition can be made about the concept of relational governance based on the patterns and information gained:

- Higher dependence of the supplier leads to more mutual interests and information sharing in the buyer-supplier relationship

Cluster B (contractual governance)

- Substitutability

- Coercive and reward based actions - Financial incentives

This cluster shows the relation between interdependence and contractual governance. One thing that should be noted in this cluster is that there are less variables that are part of contractual governance then the amount of variables that are part of relational governance, which can be explained by the basic agreements used in the contracts.

The pattern found in cluster B is that high or low substitutability has either high or low coercive/reward based actions and financial incentives. High substitutability relates to low financial incentives, this makes sense since the competitive prices ensure that financial incentives are not necessary. When financial incentives are used, coercive/reward based actions are also added to the contract.

The following proposition can be made about the concept of contractual governance based on the patterns and information gained:

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4.2.2 Propositions on descriptive codes

Using the analysis of the interviews and the patterns found above, propositions are formulated based on the descriptive codes. These codes will help as well to answer the research questions.

Inter-organizational trust

Inter-organizational trust can be seen as the level of trust between the buyer and supplier on organizational level in the relationship.

The data provided by the interviews shows that three out of four cases explicitly stated that reliability and quality are more important than the price of the strategic items provided by the supplier. The data gathered also shows that the prices in the supply-chain are mostly competitive based, also because most of the companies know each other and it is almost impossible to ask different prices as a supplier. All cases show that a significant part of the orders are based on projects, both buyer and supplier want to be chosen by the customer to deliver this project, which in turn leads to mutual interests in the buyer-supplier relationship.

The following propositions based on inter-organizational trust can be derived from the patterns and results identified with the interpretive codes used for this research:

1. Quality and reliability are important factors in the buyer-supplier relationship and more important than the price aspect.

2. If the delivery is project based and in case of high inter-organizational trust, buyer and supplier have a high mutual interest in the project.

Inter-personal trust

The data provided by the interviews based on inter-personal trust brings forward that communication between two parties is important. For example, in one of the four cases the sub supplier of the supplier delivered lesser quality, which was not communicated to the buying company. In this particular case it took a while before the issue was resolved. While in the other three cases if issues occur, these are very quickly resolved, because trust is an important factor between the contact persons in the companies.

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The following propositions based on inter-personal trust can be derived from the patterns and results identified by the interpretive codes used:

1. In cases of high trust in the communication and processes between the buyer and supplier, issues are solved more quickly.

2. In cases of high inter-personal trust and projects, contact persons are more willing to share information.

Interdependence

Interdependence can be seen as how replaceable, in other words substitutable, a company in the buyer-supplier relationship is. The data gathered from the interviews shows us different forms of substitutability, seen as relative substitutability, for example low substitutability but other suppliers available, or low substitutability and no other suppliers available to deliver the expected quality and reliability.

In the first case there was only one supplier able to deliver the required quality and reliability of the strategic item, which was a specific size product, other suppliers are not trusted in delivering on time and the right quality. In the second case there is a lot of competition among the suppliers, which means that substitutability is high. The third case has a supplier that cuts metal in 3D, though other suppliers can do this, it costs time and money to gain the same level of quality and reliability. In the fourth case substitutability is high to switch from supplier, because the buying company has a good reputation and suppliers want to be involved to have an opportunity to promote themselves.

The following proposition can be identified about the interdependence of parties in the buyer-supplier relationship:

1. High interdependence leads to more relational governance and higher switching costs in time and money to regain the quality and reliability needed.

Power

Power can be seen as the ability to influence choices made in the buyer-supplier relationship, in this research power is given the interpretive codes of reward based actions and coercive based actions. Financial incentives are often not used in the cases, except if companies need large quantities of items delivered in the upcoming period.

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interview describes the not using of power in one sentence: ‘’If you are misusing power towards other parties, the probability exists that this misuse will turn onto your own company’’.

Other results derived from the data show that in some cases cooperation between buyer and supplier in new projects continue. This is where the performance of the supplier is mainly monitored by the buying company.

The following propositions can be identified about power in the buyer-supplier relationship:

1. Power is rarely misused in the buyer-supplier relationship as this may backfire at a certain time.

2. Incentives may only be used in case of larger quantity orders which are predetermined to minimize the financial risk.

3. If the supplier is reliable and supplies good quality, future orders are more easily given to the supplier and vice versa.

Interplay between relational and contractual governance

The interplay between relational and contractual governance can be seen as the communication and negotiations between the buyer and the supplier of a strategic item. The data from the interviews shows that in some cases the suppliers must make an offer to the buying company to get the order of the buying company, then often the most trusted suppliers have more advantage in getting the order. In the other cases this is not possible due to the low amount of substitutability of suppliers to make an offer. The agreements made between the buyer and supplier are then put into a contract with all the basic agreements, about quality, quantity, throughput time, delivery, and price.

The following propositions can be identified based on the interplay between relational and contractual governance:

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5. Discussion

The discussion is used to discuss the results and patterns seen in the within-case analysis and the cross-case analysis. The outcomes of this research will be compared to literature to come to an overall conclusion. The outcomes per research question will be discussed below.

What is the influence of interdependence and power on relational and contractual governance? Results from my research show that interdependence has influence on both relational and contractual governance.

High interdependence has high influence on relational governance, because there are less possibilities to change between suppliers. Therefore it is important that good social contact is maintained between the buyer and supplier. Relational governance is important in such a relationship because it leads to higher trust, information sharing, and mutual interest. In this way future cooperation between the buyer and supplier can be maintained in a good way in a context of high interdependence. Switching from supplier will need an investment in time and money to ensure that the supplier delivers the right quality and reliability.

The results of my research show that in case of high interdependence financial incentives are hardly used in relationships and therefore interdependence has limited influence on the contractual governance.

Low interdependence has less influence on relational governance, because of a low level of dependence between the buyer and the supplier. For the buying company this means that the financial aspect may be more relevant and also leads to more competitive prices of suppliers. Therefore in case of low interdependence the contractual governance may be more relevant.

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Though literature (Liu et al., 2009) suggests that interdependence and power influence choices, my research shows that in a power asymmetry, relational governance and trust are more important. This indicates that a good relational governance is preferred in both high and low levels of interdependence and power.

How can trust influence the relational governance in the buyer-supplier relationship?

The results of my research show that high trust in the buyer-supplier relationship ensures a good relational governance. The basis of trust is created by delivering quality and reliability, this can further be strengthened by the amount of information sharing and mutual interests in the relation. My research also sees information sharing as a definition of trust in the interpretive codes where both parties are honest to each other. However, honesty is a narrow definition of trust, since it is possible to be honest and give the information asked for, while still knowing more relevant information. In literature trust and commitment are the key variables related to relational governance, where contractual governance can be seen as a causal reaction to relational governance and is seen as a consequence of distrust (Zheng et al., 2008). Literature shows that in relational governance there is trust, both buyer and supplier are honest and are committed to each other (Zaheer et al., 1998; Lee & Cavusgil, 2006).

We can conclude that trust in the buyer-supplier relationship is to a high level influencing the relational governance, in the sense that when trust is high the buyer and supplier do not intent to harm each other. Contractual governance is seen as a complement to relational governance and is not a form of distrust in the buyer-supplier relationship.

What is the role of financial incentives in the buyer-supplier relationship?

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companies who cooperated in this research and they do not consider using any of these forms of financial incentives.

Literature sees the use of multiple financial incentives in contractual governance as a way to improve the financial aspect, for example revenue sharing (Van der Rhee et al., 2014). However, other literature shows a trend that the more complex contracts are gradually less used and are replaced by more simple basic contracts (Zheng et al., 2008).

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6. Conclusion

The conclusion of this research describes the findings on the main research question: ‘’How can relational and contractual governance be effective in a buyer-supplier relationship?’’ for this research data is collected from companies in the metal working industry. Different types of governance were expected, because of the nature of the companies. For plate processing we expected more contractual governance, a mass product with few options for customizing. For machine systems and machine parts, a more complex industry with more customizing, relational governance was expected to be more important. However, in this research I found that all companies preferred a higher relational governance over contractual governance which is limited to basic contracts in this research. It seems they prefer relational governance as the most important governance and contractual governance is seen as a complement.

Based on the results and discussion the main conclusion is the importance of an open and trustful relational governance, the buyer and supplier communicate about the quality and reliability as well as the financial aspect on inter-organizational level in an honest way and maintain their cooperation in the future. On interpersonal level it is important that mutual interest is shown and that there is open information sharing. This also creates a power balance which implies that choices are made in favour of both parties and strengthen trust in relational governance.

Contractual governance was mainly a complement to relational governance. Contractual governance was mainly based on standardized contracts. Different aspects that seem to be important in the buyer-supplier relationships is the minimization of financial risk, financial health of companies, and the financial guarantee of the end customer.

There are two visions on contractual governance, that it complements relational governance and that it is seen as a causal reaction to relational governance as a consequence of distrust. My research showed that the companies that cooperated used contractual governance as a complement to relational governance and that the contractual governance was mainly used for administrational purposes.

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Limitations and future research

The limitations of this research are that this research is solely based on companies in metal sheet, machine parts, and the machine system industry. Also the use of four companies may not be enough to generalise the outcomes of this research.

This research is also conducted in a two-stage contract setting with only buyer and supplier used, no further companies in the chain are involved. Future research on relational and contractual governance in a buyer-supplier relationship should consider adding a third party in the relationship which has influence (Van der Rhee et al., 2014). Future research can be conducted based on different types of industries or on different levels in the supply chain.

Another limitation is that there seem to be a lot more of external variables and influences in the buyer-supplier relationship that are not taken into account in this research. Future research should assess what kind of variables and influences have a significant effect on buyer-supplier relationships and their governances. Examples of variables are third parties involved, local jurisdiction, and market complexity.

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Appendix A – Interview template (Dutch)

A. Inter-organisatorisch vertrouwen

De vragen in dit gedeelte gaan over het vertrouwen dat er is tussen de organisaties als geheel handelend, niet op persoonlijk niveau. Met deze vragen willen wij onderzoeken hoe hoog het vertrouwen is tussen de partijen en het effect hiervan op de relatie die is ontstaan tussen beide partijen en of er bij een organisatie meer vertrouwen is dan bij de andere organisatie.

1. In hoeverre hebt u vertrouwen in de organisatie van leverancier X als het gaat om: 1a. Continuïteit van leveren op de langere termijn

1b. Nakomen van afspraken die zijn gemaakt

1c. Wederzijds belang (handelen in het belang van beide partijen) 1 d. Eerlijkheid

Vragen voor de CEO:

1. Hoe hoog is het vertrouwen in de markt tussen uw organisatie als koper en leverancier in deze markt?

B. Interpersoonlijk vertrouwen

De vragen in dit gedeelte kunnen gezien worden als een verlengstuk van het vorige gedeelte, waar het vorige gedeelte het vertrouwen behandelde tussen organisaties, gaat het bij interpersoonlijk vertrouwen om de personen die contact met elkaar hebben tussen beide partijen, wat het effect is van dit vertrouwen op de relatie tussen koper en leverancier en het interpersoonlijk vertrouwen tussen de partijen.

1. Hoe vindt u uw contactpersoon van leverancier X handelen tijdens onderhandelingen?

2. Wat doet u als de prestaties van uw contactpersoon bij leverancier X beneden verwachting zijn?

3. Denkt u dat uw contactpersoon er alles aan doet om uw belangen te behartigen, ook als hier veel tijd en geld aan gebonden zijn? Waarom wel/ niet?

Vragen voor de CEO:

1. Zijn er in het verleden vertrouwens kwesties geweest met leveranciers? Hoe zijn jullie hiermee omgegaan? Wat was de invloed van de relatie hierop?

C. Onderhandelingen

De vragen die gesteld worden in het gedeelte onderhandelingen gaan over veranderingen die toegepast worden die financiële gevolgen hebben voor de contractuele relatie dan wel sociale relatie. Hiermee wordt bekeken wat voor effect onderhandelingen hebben op de relatie en deze vragen bepalen mede de verantwoordelijkheid die bedrijven tonen ten opzichte van dergelijke veranderingen.

Vragen voor de CEO:

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1. Hoe makkelijk/snel gaan onderhandelingen tussen uw bedrijf en de leverancier X wanneer nieuwe plannen besproken moeten worden?

2.Wat valt er te zeggen over de openheid van beide partijen om items te heronderhandelen, indien daar behoefte voor is? 3. Als er veranderingen doorgevoerd moeten worden, in hoeverre delen beide partijen de verantwoordelijkheden en risico’s?

D. Onderlinge afhankelijkheid

In dit onderdeel vragen we naar de mate van afhankelijkheid in de relatie. Het gaat hierbij om de inter-relationele verhouding. Aan de hand van deze vragen kunnen we de verhoudingen in de relatie bepalen. De volume van investeringen, beschikbaarheid van andere leveranciers en afgestemde productie systemen, geven ons informatie over de overstap kosten van het bedrijf als het van leverancier wil veranderen.

Vragen voor de CEO:

1. Hoe groot is de concurrentie op de markt van uw leverancier? 2. Zijn er in deze markt specifieke investeringen nodig in leveranciers? 3. Hoe afhankelijk is de leverancier van u als klant?

1.Hoe lastig is het om leverancier X te vervangen?

2.Wat voor significante investeringen hebben jullie gedaan in leverancier X en hoe heeft dat de afhankelijkheid beïnvloedt? 3.In hoeverre is jullie productie systeem afgestemd op de producten van leverancier X? (Bijv. switching costs bij overstappen naar een andere leverancier)

4.Hoe benut leverancier X de onderlinge afhankelijkheid die er in de relatie is?

E. Gebruik van macht in een relatie

De vragen die gesteld worden in dit gedeelte gaat over de machtspositie die bestaat tussen de twee belanghebbende partijen die bestaan uit een koper en een leverancier. Deze vragen zullen verduidelijken waar en wie relatief gezien de meeste macht heeft en wat voor effect deze machtspositie heeft op de relatie tussen de twee partijen.

De definitie van macht kan gezien worden als het vermogen om invloed uit te oefenen op keuzes die gemaakt worden in de relatie.

Er zijn diverse soorten macht die van toepassing kunnen zijn op het gebied van buyer-supplier relationships: kennis en expertise, positieve relatie, rechtmatige macht (op basis van contract), beloningen, uitdelen van boetes.

1. Er zijn diverse soorten macht waar een bedrijf voordeel van kan hebben, van welke soorten macht denkt u voordeel te hebben en hoe gebruikt u deze?

2. Wat kan leverancier X gebruiken om een beter voordeel te verkrijgen bij onderhandelingen? Wanneer dit gebeurt, hoe wordt dit duidelijk gemaakt? Waarbij gedacht word aan het gebruik van een macht beschreven in gedeelte A.

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Appendix B – Document study template

Item Outcome Measurement

Determined terms

1. Are the rights of the buyer and supplier determined?

Very determined (ACR) Not determined (OCR)

2. Are delivery quantities determined?

Very determined, fixed quantities (ACR) Less determined, flexible quantities (OCR) 3. Are the prices

determined?

Very determined, fixed prices (ACR)

Less determined, flexible prices (OCR)

4. Are the timing of payments determined?

Fixed timing in payment (ACR)

Flexible payment terms (OCR)

5. Which audit rights are determined for both parties?

Very determined (ACR) Less determined rights (OCR)

6. If goals aren’t met, what are the effects?

Coercive effects (ACR) Joint problem solving (OCR)

7. Long or short term agreement?

Short term (ACR) Long term (OCR)

Information and privacy

8. What information is shared?

Little or irrelevant information sharing (ACR) Critical and frequent information sharing (OCR) 9. How are privacy

issues determined?

Very determined with high privacy protection (ACR) Less determined with low privacy protection (OCR)

10. At what interval results are exchanged?

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Clarity of roles

11. Which party is in control of planning and production?

One party is solely in control (ACR)

Both parties jointly engage in planning and production (OCR)

12. Are there investments involved?

No investments (ACR) Investments from both sides (OCR)

13. How and by whom are results measured?

Results are measured on frequent basis by one party (ACR)

Results are measured less frequently and both parties monitor progress (OCR)

Financial incentives 14. Is there any revenue sharing or risk sharing mechanism involved between both parties? 15. Is there a policy

that safeguards the buyer and/or supplier against demand uncertainty? 16. Are price and

Effective Governance of Buyer-Supplier Relationships