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A Framework to Promote Customer-Supplier Relationships

Abstract The purpose of this paper is to build a framework for the evaluation and development of important customersupplier relationships. The motivation for building such a framework is that companies do not always have functional and practical methods for the evaluation of their relationships. The focus of the paper is on businessto-business situations and on the value of the relationship to the supplier, rather than the customer. The empirical point of view used in this paper is obtained from expert opinions of the managers of a key account management team of a process industry company. The framework presented here is an example based on a process industry case. Keywords: Supplier evaluation, customer evaluation, key account management, buyer-seller relationships.

1. Introduction Companies in business-to-business (b-to-b) markets are struggling with increasing competition which arises from market globalization, rapid technological changes and more demanding customers. Supplier and customer relations are a significant form of these interorganizational relations, and value creation in customer relations must be understood and managed carefully. It is important for companies to understand and evaluate which factors influence their relationships with other companies. An identification of the influence of these factors can be used to focus a company’s efforts to the areas that are most important, improving the competitive advantage derived from that relationship [1, 2]. Sales and marketing management need to be able to understand the mechanisms of value creation to manage their customer relationships effectively and to nourish these relationships for competitive advantage. Managers know that all customers are not equal. Companies operating in b-to-b markets pay more attention to the maintenance and the improvement of special relationships with their most important customers. A number of customers typically represent a high percentage of sales or profits. Companies often have key account management (KAM) programs to effectively manage their important customer relations. The purpose of KAM-programs is to serve strategically important customers in a more individual manner than ordinary accounts. A core assumption in key account literature is that supplier companies are willing to increase their input into important customer relationships because they hope to enhance the relationship outcome [3]. Customers in b-to-b markets may have specific demands and needs to be fulfilled and they often trust a few sellers to a great extent. Suppliers should have a deep knowledge of the buyer’s behaviour, needs, problems and satisfaction in order to differentiate their offers and to obtain a competitive advantage [4]. If supplier companies are interested in understanding the relationships with buyer companies and the degree of buyer’s satisfaction, they should have profound knowledge of the buyer’s internal buying process, as well as the variables that influence it [4]. Suppliers should be aware of the fact that the relationship between buyers and sellers cannot be analyzed in isolation [5-6]. The purpose of this paper is to introduce a framework for evaluation of customer-supplier relationships. The framework is based on a checklist-type model, which consists of critical 1

evaluation criteria for the particular relationship, which need to be filled before moving on to deeper relationship with a particular customer, and it also guides the development to right aspects of the relationship. The focus of the paper is on b-to-b situations and on the value of the relationship to the supplier, rather than to the customer. The motive of concentrating on the supplier’s perspective is that customer relationships can supply an important contribution for corporate success. The empirical material used in this paper is obtained from expert opinions of the managers of a global process industry company. 2. The Development Process of the Framework The starting point of the generated framework is to evaluate the relationship of the buyerseller organizations from three different points of view. These three viewpoints are the supplier expectations, the customer expectations and the joint value perspective. The basic idea of the model is to observe and think over the motives of both sides of the relationship and to evaluate the benefits of the relationship (figure 1). These three main factors must be specified by a set of sub-factors for each category. The sub-factors are industry and company specific. The generated factors should focus on the evaluation of the strategic level of the relationships, as the model is not intended for the evaluation of all customers of the company. A preliminary selection has already been made: firms have been evaluated against some “must-meet” criteria, which are presumed to be in a good state (e.g. delivery time, quality).

Supplier expectations

Joint value perspective

Customer expectations

Figure 1. Evaluation perspectives of the framework. The evaluation framework is based on the opinions of a group of experts. Groups are good at combining talents and providing innovative solutions to possibly unfamiliar problems [7] and generally hold an advantage over individual decision makers when working with complex and poorly structured problems. The company should involve several of its experts from different fields related to customer relations, partnership management, management of technology etc. and take their opinions into consideration in the process. The framework should be able to support the use of imperfect and quantitative knowledge, because in relationship assessment the decision makers often must make choices with partial and inexact information. The authors used different sources of information to form the evaluation criteria for the model. Data was collected from literature and from the KAM-team of the case company. The Delphi method was used to get comments and feedback about the preliminary framework. The Delphi method is a special form of survey which is designed to ensure a participant’s anonymity, controlled feedback and iteration, and a statistical group response [8]. In this case, the Delphi method is adapted because of its practical advantage in obtaining a consensus from a group of decision makers. The Delphi method was developed in the early 1950s at the RAND Corporation for military applications and since then it has been used in a variety of tasks ranging from technology assessment to forecasting and foresight [8, 9]. Its objective is to obtain the most reliable

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consensus of opinion for a group of experts without direct confrontation. The Delphi method is composed of three essential processes [10]: 1. Achieve judgements from individual group members 2. Collate and statistically summarise the individual judgements 3. Feed the collated information back to individual members without revealing their identity and seek for a revision in their judgements, if any. Theoretically, the sequence of collating, feedback and revision is repeated over several rounds until there is no further change in the expert opinion [10] i.e. a consensus is achieved. After each round, a facilitator provides an anonymous summary of the experts’ opinions from the previous round as well as the reasons they provided for their judgments. Participants are encouraged to revise their earlier answers in light of the replies of other members of the group. It is believed that during this process the range of the answers will decrease and the group will converge towards a consensus. Finally, the process is stopped after a pre-defined stop criterion (e.g. number of rounds, achievement of consensus or stability of results) and the mean or median scores of the final rounds determine the results [11]. A Delphi survey requires a substantial amount of work. Each round of mail surveys and summarizing the answers can easily take over a month [8]. This time can be considerably reduced by using e-mail or internet based survey tools or group support systems (GSS). For example, the GroupSystems GSS-software enables the user to create a virtual meeting room environment where each group member can contribute anonymously to the survey issues from anywhere at any time (see www.groupsystems.com). GSS can also be used in a decision room environment, where all experts are present at the same time. 3. The Proposed Approach Figure 2 illustrates three main steps of building and using the framework in practice. In the first phase, the criteria for the framework are generated by an expert group. Delphi analysis can be used to support the criteria development. In phase two, the relationship evaluation is done by using a simple scoring method. In phase three, analyses are made and further actions are discussed. 1. Creation of the framework

2. Relationship evaluation

3. Action planning

Figure 2. Phases of the evaluation process. 3.1 The criteria definition for the framework The preliminary framework was built by a group of authors from the university who consulted industry experts. Literature was used to identify commonly used criteria when the company evaluates its important customers and suppliers. This preliminary framework was used as a base in the Delphi survey. The expert group were asked to evaluate the framework. They were asked to add or remove criteria, or to present critical opinions about the model. The authors collected opinions on the important criteria for the framework by personal interviews and by an e-mail survey. The expert group were carefully selected from the KAMteam members of the case company. The expert group had five participants. Two feedback rounds were finally carried out. This chapter presents criteria used in the final framework.

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Supplier expectations –criteria Customers are an important source of competitive advantage for suppliers because, in addition to revenues, suppliers can get e.g. product ideas, technologies, and/or market access from their customers [12-14]. The supplier needs to offer value to the customer but also needs to get benefits from the customer at the same time. Suppliers need to understand how value can be created through relationships with customers [12]. An empirical research by Kalwani and Narayandas [15] indicates that suppliers focusing on a few selected customers achieve higher profitability in long-term relationships by reducing their costs to a greater extent than supplier companies who employ a transactional approach to deal with customers. Suppliers create relationships with customers who are seen to be the lead users of technology or whose product expertise is high, and suppliers often discount shortterm financial gains for the long-term benefits of networking innovation development [16, 17]. Product and process innovations developed together with a customer may improve the value of the supplier’s offerings to the customer in the future as well as to other customers [12]. Table 1 presents the criteria which were chosen for the relationship evaluation framework. These supplier perspective criteria were discussed and agreed on with the industry experts. Evaluation criterion Customer’s attractiveness

Explanation - customer’s financial status - customer’s current position and development potential in its own business area - customer’s purchasing strategy - supplier’s share of the customer’s total purchases - strategic compatibility Customer’s position in the - current share of turnover, volume and profit supplier’s customer - growth potential in the desired areas portfolio Relationship risk profile - potential changes in personnel on the customer side - potential changes in the overall strategy of the customer - potential changes in the customer’s procurement strategy Depth of relationship - potential for co-operation beyond a standard customersupplier -relationship - potential for profitability improvement through extended co-operation in areas like supply chain management - customer’s willingness to invest in relationship development in the long term Table 1. Supplier expectations. When the framework is used in evaluation, the decision maker should note that the ‘relationship risk profile’ criterion needs to be scored same way as the other criteria; 5 means low risk profile (the most preferred status) and 1 means high risk level. Customer expectations –criteria Supplier evaluation and selection is one of the most important tasks of companies, since supply performance can have a direct financial and operational impact on their business [18]. Because of its importance, supplier evaluation and selection has been a very popular subject in the literature. Several studies have pointed out the benefits of starting long-term partnership with suppliers at product or process development level. Reported benefits have been better 4

product quality, fast project development times, leverage of new capabilities, reduction of transaction costs, improvements in technology and delivery speed, lower development and product cost, increased supplier-originated innovation and increased level of motivation of suppliers [19-22]. Supplier selection task is complicated by the need to consider various criteria during decisionmaking. Ghodsypour and O’Brien [23] proposed cost, quality, and service as the three main supplier selection parameters. However, in today’s global economy where concurrent product and supplier development are common, strategic supplier selection and evaluation decisions must not be solely based on traditional selection criteria [24]. Dickson [25] identified 23 criteria for supplier selection based on a survey of 273 purchasing managers. According to Dickson’s survey the seven most commonly mentioned criteria were quality, delivery, performance history, warrant and claim policy, production facilities and capacity, net price, and technical capabilities. In a comprehensive review of supplier selection methods, Weber et al. [26] reported that the six most commonly mentioned criteria were price, delivery, quality, facilities and capacity, geographic location, and technical capability. Choi and Hartley [27] surveyed purchasing managers to identify their supplier selection practices in the US automotive industry. According to Choi and Hartley the important supplier selection criteria were finance, consistency, relationship, flexibility, technological capability, service, reliability, and price. Many other criteria should be considered when company is planning a long-term supplier relationship such as long-term management practices, quality management practices, technology and innovativeness level, suppliers’ cooperative attitude and co-design capabilities, and cost reduction capabilities (e.g. [20, 28-30]). In addition, Huang and Keskar [31] present an extensive set of comprehensive and configurable metrics for supplier selection metrics. They proposed categories for criteria as reliability, responsiveness, flexibility, cost and financial, assets and infrastructure, safety, and environmental. Evaluation criterion Supplier’s attractiveness

Quality philosophy Technological capability Strategic fit

Relationship development potential

Explanation - supplier’s financial status - supplier’s position in the customer’s current procurement portfolio - supplier’s expected position compared to other potential suppliers in the industry - policy of continuous quality improvement - quality systems - product needs are matched by supplier’s offering - willingness to develop products for and with the customer - supplier supports customer’s strategy - supplier takes the customer in its KAM program - compatibility of values and image, management systems, IT etc. - matching geographical coverage - supplier’s willingness to invest in the relationship - expected benefits for the customer from extended and deepened co-operation Table 2. Customer expectations.

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The framework considers the strategically important evaluation criteria from the point of view of the customer. It is presumed that the preliminary evaluation of the suppliers has already been done, and the basic requirements are met. Table 2 presents the used evaluation factors from the customer’s perspective. The Delphi panellists commented the criteria from their industry viewpoint. ‘Willingness to develop products with the customer’ was noted by the panellist as normally not something the supplier would want to do in their particular industry, unless the importance of the customer is significant. The benefits must be compelling to offset the pressure coming from other customers by selling a product exclusively to their competitor. In addition, the panellists commented ‘technological capability’ criteria as a strength from a customer’s point of view is the perception that the supplier has a strong technical service as well as an ability (R&D) to work on a scientific level to solve more complex problems that impacts the efficiency of the customer’s manufacturing process. Joint value Value creation is regarded as the essential purpose of a customer firm and a supplier firm to engage in a relationship [32-34]. A competitive advantage exists for companies that are engaged in successful long-term buyer–seller relationships [35, 36]. Value-added practices may be initiated by either the customer or the supplier. Value creation is the process by which the competitive abilities of the partners are enhanced by being in the relationship. This value is created by the synergy from the partnership whereby each partner gains from the relationship. This value may come in the form of technology, market access, information, lower prices and operating costs, and knowledge. Often the partners will adapt their processes or products to meet a partner’s specific need [2]. Creating value in a relationship is the process by which the partners’ competitive abilities are improved by being in the partnership [13]. The capabilities of the partners are combined so that the competitive advantage of either one or more of the partners is improved [37]. Value can be regarded as a trade-off between benefits and sacrifices [38, 39]. Some define value in business markets monetarily [40, 41], whereas others use a broader value definition, which also includes non-monetary revenues, such as competence, market position, and social rewards [13, 32, 39]. Value can be defined as the perceived trade-off between multiple benefits and sacrifices gained through a customer relationship by key decision makers in the supplier’s organization. Those benefits and sacrifices can result from the relationship under question as well as from connected relationships on which the focal relationship has an impact or is affected by those other relationships [12]. In any market, key sources of joint value creation include better quality and design. Quality is a major determinant of cost, cycle time, product reliability, and customer value. The cost of poor quality greatly raises a product’s final costs (rejects, repairs, returns). Alliances with suppliers can reach quality levels exceeding what the companies can do alone. Customers can also help suppliers through quality audits and by sharing experience data with them. The process of cooperation in design depends on the customer’s market and product, as well as its suppliers and the goods they provide [42]. According to Powers and Reagan [2] the factors that influence relationships are reputation, performance satisfaction, trust, social bonds, comparison level of the alternative, mutual goals, power/interdependence, technology, non-retrievable investments, adaptation, structural bonds, cooperation, and commitment.

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Evaluation criterion Balanced, smooth collaboration

Operational efficiency improvement Mutual learning

Technological innovation Commercial innovation

Explanation - balanced investments to the relationship from both sides - realistic expectations on both sides aiming to a long-term win-win –situation - availability of resources with the required personal characteristics on both sides - joint efforts to increase efficiency on both sides and to reduce costs in the supply chain - understanding the business and needs of the other party - finding new business opportunities through joint learning and innovation - new innovations and products through extensive R&D-cooperation - development of new product and service concepts through co-operation - expansion to new markets through joint campaigns Table 3. Joint value creation.

Table 3 presents the evaluation criteria from the joint value perspective chosen for the model by the Delphi panellists. The panellists stressed the significance of the question: ‘Are both parties ready to invest in resources for joint developments?’ Success requires an equal twoway input over time. Also, from the view of both sides, confirmation of top management support is a must for success. In addition, panellists agreed that multilevel contacts are critical. 3.2 The evaluation of the relationships with the developed framework The relationship evaluation is made by a small group. The expert group can have participants from both companies (supplier and customer representatives). The final framework can be presented to the participants for example in the form of mind map. If the supplier does not want to show their part of the framework, only the evaluation of the joint and the customer perspective are made in cooperation. The group analyses the relationship systematically according to each criteria and gives a score from one to five (one being the lowest and five being the highest assessment). To visualize the ratings, the numbers can be replaced by a traffic light -type colour-scale (red, orange, yellow, lime and green). The use of colours may help in pointing out the problem areas in the relationship. The results of all evaluations can be presented by only three simple bar charts. Figure 3 shows a practical and quick way to illustrate the evaluation results to a group. In this example, the bar chart shows the results of two different relationship evaluations (for the supplier’s internal use) from the supplier’s point of view. The dashed line is an alarm threshold; evaluations under this line should be carefully noted when the further actions are planned.

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Customer 1

Customer 2

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Assessment

5 4 3 2 1 0 Customer’s attractiveness

Customer’s position

Risk profile

Depth of relationship

Figure 3. Example of the profile of value evaluation from the supplier point of view. Figure 4 presents how a summary of multiple relationship evaluations can be illustrated for a group. In the example, a bubble chart is used to summarise the evaluations of three different relationship of a supplier company. Customer perspective is on the y-axis, and it is an average calculated from the customer evaluation part of the framework. The x-axis shows the average value of the supplier perspective. The number and the size of the bubble illustrate the joint value of the relationship. The bubble chart gives a useful visual general view for the management and evaluation of the relationships of the supplier.

Customer expectations

5 4

3,6 2,0

3

Relationship A Relationship B Relationship C

1,0

2 1 0 0

1

2

3

4

5

Supplier expectations

Figure 4. Bubble diagram for presenting the summary of the evaluations. The final phase of the evaluation process includes making a relationship development plan. In this phase, the aim is to utilise the results derived from phase two. The evaluations are analysed by a group which has participants from the supplier company and possible from the 8

Customer expectations

customer company. The weak areas of the relationship are discussed and the motivation to enhance these areas is clarified. Figure 5 present four quadrants of the bubble diagram and some remarks of their characteristics which can help the supplier to analyse their customer relationships. - customer finds this relationship attractive - supplier do not feel this relationship is worth further investments - if the joint value is rated high this relationship may have potential for further investments - do we want to satisfy this customer, why and with what price? - keep the relationship alive, but limit spending

- both parties find this relationship attractive - is the joint value rated high compared to other relationships in this quadrant? - this relationship is very important and has high potential - consider making even substantial investments to continue the relationship

- both parties find this relationship not so attractive for further investments - the joint value is probably rated low in this quadrant - the “cash cow”-quadrant: consider terminating the relationship if profitability is not adequate

- supplier find this relationship attractive - customer do not feel this relationship is worth further investments - if the joint value is rated high this relationship may have potential for further investments - how could we raise our importance to the customer? - is the relationship truly a feasible investment, or should it be terminated?

Supplier expectations

Figure 5. The relationship dimensions. 4. Discussion This paper has discussed the problem of managing co-operative relationships in a business-tobusiness environment. The paper proposes a scoring model for multi-dimensional evaluation of customer-supplier relations for the benefit of both parties. The benefit of the three-way approach (analysis of the supplier and customer expectations and joint value of the relationship) is that it can help the planning team to take the viewpoints of both companies consideration. This may be more fruitful approach for the development of the relationship than if the company only evaluates its own benefits from the partnership. This approach may also help the company to understand its customer better, and it may help the supplier discover what the customer really thinks about them. The paper contributes to the existing research by presenting a novel perspective to the problem. The existing literature has seldom considered different perspectives on the same issue, although there is a clear risk that the customer and supplier may have a drastically different view on the importance and future of the relationship. The practical implications consider practising managers who are engaged in customer relationship management. The framework enables the decision maker to challenge conventional wisdom and alleviate biases caused by perhaps years of ongoing personal interaction with the customer and to assume a more analytical perspective on customer relations.

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According to the comments from the Delphi panellists this framework covers the key aspects of supplier-customer relations, and offers an adequate framework for analysing customer relations. In addition, the panellists thought that there are no irrelevant criteria included in the framework although some are more important than others. The consensus among the participants was that the model focuses on right issues in relationship management and provides a realistic view on the relationship. The authors feel that the developed framework seems rather simple to use and the results are presented in illustrative and clear way. Bars charts and bubble diagrams can be used to manage ‘the relationship portfolio’ of the supplier. Also, using the qualitative evaluation criteria supports the utilization of the manager’s tacit knowledge. The Delphi method seemed to be a functional way to form the evaluation criteria for the framework. The evaluation of the validity of the research is done here to assess the quality of the research and the results. The framework was formed to improve the problem area of the target company. There were clear interest in the research field from the case company, and thus the research area seemed to be worth studying. The practical functioning of the framework has been verified by interviewing the Delphi panellists and by evaluating the quality of the results. The close cooperation between the research team and the experts from the case company promoted the credibility of the research. The primary criterion to assessing the results is their practical usefulness, which raises the issues of the relevance, simplicity and easiness of operation of the framework. According to case experiences, the framework seems practical and simple enough to be useful for its purposes. In qualitative research the research is normally based on a limited amount of research data, for example on one or few studied case situations. The reason for this is usually the limited time and resources, because understanding one case situation profoundly is very laborious and time consuming. In this study the starting point of the research was a real problem situation, and the research environment is a real situation. This often sets some restrictions to the sample size. The great challenge of this kind of research is to make conclusions which can also be reliably generalised to other situations in a similar environment. Generalization of research results is hard and seldom done without any gaps. However, in this study there was no intention to generalize the research results to any company or industry setting. In this case it is not possible or necessary to prove that the research findings presented in the study are general and suitable to any possible settings. 5. References 1. Takala, T., Uusitalo, O., 1996. An alternative view of relationship marketing: a framework for ethical analysis. European Journal of Marketing, 30 (2), 45–60. 2. Powers, T.L., Reagan, W.R., 2007. Factors influencing successful buyer–seller relationships. Journal of Business Research, doi:10.1016/j. jbusres.2007.04.008. 3. Ivens, B.S., Pardo, C., 2007. Are key account relationships different? Empirical results on supplier strategies and customer reactions. Industrial Marketing Management, 36, 470– 482. 4. Sanzo, M.J., Santos, M.L., Vazquez, R., Alvarez, L.I., 2003. The effect of market orientation on buyer–seller relationship satisfaction. Industrial Marketing Management, 32, 327– 345. 5. Anderson, J.C., Hakansson, H., Johanson, J., 1994. Dyadic business relationships within a business network context. Journal of Marketing, 58 (4), 1–15. 6. Ford, D., Gadde, L.-E., Hakansson, H., Lundgren, A., Snehota, I., Turnbull, P., Wilson, D., 1998. Managing business relationships. Chichester, UK, Wiley. 10

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