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EJM 40,5/6

Supplier development practices: an exploratory study Stephan M. Wagner

554

WHU – Otto Beisheim Graduate School of Management, Vallendar, Germany

Received August 2004 Revised May 2005

Abstract Purpose – Seeks to provide a more differentiated view of supplier development activities currently applied by European firms. Design/methodology/approach – An exploratory empirical study was conducted based on a review of previously published research on supplier development and case studies with 12 industrial firms. The survey responses from 173 firms were factor-analyzed to explore various dimensions of supplier development and their interrelationships. Furthermore, an industry-level analysis was performed. Findings – Firms are reluctant to develop suppliers. Two dimensions of direct and four dimensions of indirect supplier development were observed. Providing human and capital support to suppliers (i.e. two dimensions of direct supplier development) is strongly related to formal supplier evaluation, structures and processes for evaluating suppliers as well as communication (i.e. three dimensions of indirect supplier development). Research limitations/implications – Future studies should incorporate the perspective of the supplier firm, include small and medium-sized enterprises, and approach pressing questions related to performance implications for the buying firm and sharing of the benefits achieved in supplier development activities. Practical implications – Firms can compare their approach towards various supplier development practices with the approach taken by a representative sample and their industry as a whole. Originality/value – The paper conducts new research in a European setting. Furthermore, a novel industry-level view is presented. Keywords Buyers, Supplier relations, Germany, Switzerland, Australia Paper type Research paper

European Journal of Marketing Vol. 40 No. 5/6, 2006 pp. 554-571 q Emerald Group Publishing Limited 0309-0566 DOI 10.1108/03090560610657831

1. Introduction It is widely accepted that in order to compete and survive, firms must seek, build up and maintain relationships with capable suppliers and extract the maximum value through such relationships (Carr and Pearson, 1999; Dyer, 1996). First, with external spend accounting for up to 60 or even 70 per cent of the budget in many industries (Heberling et al., 1992), firms have to work through suppliers to facilitate and realize significant cost savings and can no longer limit such efforts to their firm boundaries. Second, the specialized competencies residing with suppliers may have a substantial influence on the buying firm’s innovativeness and ability to offer high-quality products (Bessant, 2004; Dyer and Nobeoka, 2000). Third, the performance demonstrated by the supplier on a day-to-day basis (e.g. delivery time, delivery reliability, product quality) is influential (Tan et al., 1998). Firms can approach in a variety of ways the following problems: . current suppliers are not able to provide a demanded product; . suppliers are either not performing up to expectations or requirements;

. .

the composition and quality of a firm’s supplier base is not competitive; or capable suppliers are not available in certain markets (Handfield et al., 2000; Krause, 1999; MacDuffie and Helper, 1997):

These approaches include: . supplier switching, i.e. searching for alternative sources of supply and sourcing the product from a more capable supplier; . vertical integration, i.e. bringing the needed product in-house by acquiring the supplier or setting up manufacturing capacities internally; and . supplier development, i.e. supporting the supplier in enhancing the performance of their products and services or improving the supplier’s capabilities. The third option is becoming increasingly important since the first option might not be viable due to unavailability of alternative suppliers or due to excessively high switching costs, and the second option might require substantial investment and be in contradiction with firms’ intentions to focus on their core competencies. Taking these arguments and the lack of dedicated studies on supplier development in the context of European firms as a point of departure, this article’s objectives are: . to review and summarize previous concepts and studies on supplier development (hitherto primarily conducted in the USA); . to analyze the various supplier development activities for common factors, i.e. to identify dimensions underlying the supplier development activities that represent indirect and/or direct supplier development activities; . to investigate differences in the use of supplier development activities currently being employed by firms in European countries; and . to investigate whether there is an associative relationship between different supplier development dimensions. These objectives were pursued through a comprehensive review of the related literature, company case studies, and a large-scale survey of firms from Germany, Switzerland and Austria. The rest of this article is organized as follows. Section 2 presents the literature review. In section 3, the methodologies used for the qualitative and quantitative inquiry underlying this study are outlined. The results of the analysis – i.e. the dimensions of direct and indirect supplier development activities – are presented and discussed in Section 4. Furthermore, industry patterns and firm characteristics are analyzed and discussed. The final section contains a discussion of the results, conclusions and recommendations that can be drawn from the research. 2. Analysis of the pertinent literature Even though the basic notions of supplier development can be traced back to ancient times and consumer and military buying aspects (Leenders, 1966), it was used more intensively during and after World War Two by Toyota in Japan. In 1943, Toyota joined a supplier association (renamed thereafter Kyoho Kai ) to assist a number of subcontractors in the Tokai region in improving productivity (Hines, 1994). From then on, supplier associations within the Toyota supply network and collaboration between

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Toyota and its suppliers grew constantly (Dyer and Nobeoka, 2000; Hines, 1994). With some exceptions, such supplier development played little part and was not widespread in the Western economy until the 1990s (Hines, 1994). From then on, firms in the automotive industry pressed ahead with this practice and turned it into a popular and powerful approach to improve supply chain performance in Western industries (Lamming, 1993; Womack et al., 1990). Other chronicled examples of supplier development practices applied subsequently by firms outside the automotive industry are, for example, John Deere, Harley-Davidson, Digital Equipment Corporation, Motorola, or Marks and Spencer (Golden, 1999; Hines, 1994). An analysis of the academic literature explicitly looking at supplier development shows that research in this domain has a long history in North America. A doctoral dissertation dealing with this topic was published as early as 1965 (Leenders, 1965). Soon after, the first article by Leenders (1966) reporting on the supplier development activities of an industrial firm in Canada appeared. Years later, when the business environment forced firms to pay more attention to quality management issues, supplier development emerged as a prominent method. So the “first wave” of supplier development research (1989-1991) was initiated by researchers in the quality management field. The “second wave” covers the period when researchers picked up on relationship management issues (since 1995). The few large-scale empirical studies in previous years (mainly in the United States) were the basis for a number of publications. As such, Krause’s survey of 527 industrial and service firms in the United States is most influential (Krause, 1997; Krause, 1999; Krause and Ellram, 1997b; Krause et al., 2000; Krause and Scannell, 2002). These publications were devoted exclusively to supplier development practices. In Europe, on the other hand, only a few surveys and analyses touched supplier development issues while investigating supplier relationship, supply chain, or quality management issues (De Toni and Nassimbeni, 2000; Lascelles and Dale, 1989; New and Burnes, 1998; Quayle, 2002). Hitherto, large-scale empirical research focusing on supplier development in European countries has not been published. Watts and Hahn (1993, p. 12) define supplier development as “a long-term cooperative effort between a buying firm and its suppliers to upgrade the suppliers’ technical, quality, delivery, and cost capabilities and to foster ongoing improvements”. Likewise, for Krause and Ellram (1997a, p. 21), supplier development encompasses “any effort of a buying firm with its supplier to increase the performance and/or capabilities of the supplier and meet the buying firm’s supply needs”. Although most researchers agree with and regularly cite these definitions, several different facets of supplier development have been distinguished in the pertinent literature. First, a few rather general supplier development processes that support firms in identifying, evaluating, conducting and following up on supplier development projects have been recommended. For example, Krause et al. (1998) described a generic ten-step process model ranging from the identification of critical commodities for development to the systematic institution of ongoing continuous improvement. Furthermore it was proposed that process-oriented rather than results-oriented supplier development may be more effective, because it increases the supplier’s ability to act on its own and improvement efforts will continue once the buying firm finishes its activities (Hartley and Jones, 1997).

The second distinction concerns the supplier to be developed. If the goal is to develop a new source of supply – that is, a supplier that has not delivered products to the firm before – supplier development was considered to take a “narrow perspective” (Hahn et al., 1990) or was termed “reverse marketing” (Blenkhorn and Banting, 1991; Leenders and Blenkhorn, 1988). On the other hand, if a firm develops a supplier who currently supplies products, the firm takes a “broad perspective” (Hahn et al., 1990). Third, efforts can vary according to the buying firm’s motivation in its initiation and implementation of supplier development measures. Firms taking a “reactive approach” initiate measures only in case of poor supplier performance and to eliminate existing deficiencies, i.e. when problems have already occurred. By contrast, with a “strategic approach” firms try to improve supplier performance actively and for the long-term, i.e. before performance problems actually occur (Krause et al., 1998). Fourth, supplier development can be distinguished by the role the buying firm plays, i.e. according to the resources committed to a specific supplier. In the case of “direct” (Monczka et al., 1993) or “internalized” (Krause et al., 2000) supplier development, the buying firm plays an active role and dedicates human and/or capital resources to a specific supplier. From a transaction cost perspective, direct supplier development refers to a transaction-specific investment by the buying firm (Williamson, 1985, 1991). Direct supplier development includes activities such as on-site consultation, education and training programs, temporary personnel transfer, inviting the supplier’s personnel, as well as the provision of equipment or capital (Krause, 1997; Krause et al., 2000; Monczka et al., 1993). However, direct supplier development poses problems in terms of the potential for opportunistic behaviour on the part of the supplier. Hence, the firm must safeguard its supplier-specific investments, for example by establishing long-term buyer-supplier relationships. The buyer-supplier relationship will shift from abstract to relational (Frazier et al., 1988; Heide and John, 1988). Contrariwise, the buying firm commits no or only limited resources to a specific supplier in case of “indirect” (Monczka et al., 1993) or “externalized” (Krause et al., 2000) supplier development. Instead, the firm offers incentives or enforces supplier improvement, and hence makes use of the external market to encourage performance improvements. This is frequently done by assessing suppliers, communicating supplier evaluation results and performance goals, increasing a supplier’s performance goals, instilling competition by the use of multiple sources or promising future business (Krause, 1997; Krause et al., 2000; Monczka et al., 1993; Prahinski and Benton, 2004). 3. Methodology As suggested by several authors in the field of logistics and supply chain management, triangulation was applied throughout the study, and qualitative and quantitative research designs were combined (Jick, 1979; Mentzer and Flint, 197; Ramsay, 1998). Triangulation enhances validity and rigor and leads to a better understanding of the phenomena to be studied. Hence, the research design for this study involved multiple case studies and documentary evidence and further encompassed the collection and analysis of quantitative data. Inductive approaches draw primarily on field observations to develop theory (Ellram, 1996). Therefore, the case study protocols were primarily used to construct the survey instrument. Later, they were used again to better relate and interpret the findings of the quantitative analysis.


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3.1 Qualitative inquiry The case study method is well suited to investigating the status of supplier development activities currently employed by firms in German-speaking countries, particularly during the nascent stages of theory development, and to add “richness” to the interpretation of large-scale survey results (Ellram, 1996; Miles and Huberman, 1994). The literature shows ample precedent for the case methodology and verifies its applicability in business-to-business, buyer-supplier relationship, supply chain management, and logistics research (Bonoma, 1985; Ellram, 1996; Johnston et al., 1999; Meredith, 1998; Perry, 1998). Members of the International Marketing and Purchasing Group (IMP Group), a group of European researchers in the marketing discipline, have studied buyer-supplier relationship practices primarily using a case study methodology (Cunningham, 1980; Ha˚kansson, 1982). Because purposeful sampling of multiple cases enhances the applicability and robustness of the findings and helps to gain a deeper understanding of contingent factors (Miles and Huberman, 1994; Yin, 1994), 12 firms headquartered in Europe covering a broad spectrum of industrial activity and a diverse set of contexts were selected. The number of firms meets the “benchmark” previously recommended (Eisenhardt, 1989; Ellram, 1996; Perry, 1998) and exceeds the number in comparable studies. The firms participate in a range of industries from military/defence to household appliances and operate in a variety of technologies and production approaches, ranging from one-off to mass production. The sample firms also range in size, with annual sales varying from e490 million to e15 billion, with an average of e2.8 billion. The firms targeted in this study face highly competitive environments and experience high rates of technological change. These characteristics suggest the need for a broad range of suppliers and have compelled firms to press for quality improvements and optimize on cost and technology. Thus, all firms included necessarily rely heavily on capable and competitive supplier bases. Table I summarizes the firms studied. 3.2 Quantitative inquiry Data were collected through a mail survey which was administered to large industrial firms in Germany, Switzerland and Austria, based on pre-selected US Standard Industrial Codes (i.e. SIC 15 through 39). Industrial firms were chosen as units of Industry and/or major products

Table I. Case study firms

Material handling and logistics systems Products and systems for sanitary installations IT production equipment Silicon wafers Electrical household appliances Automotive electronics Automotive air-conditioning and roof systems Defense electronics and guided missiles Automotive electronics Commercial aircraft Power generation plants Automotive

Annual sales (e millions) 490 610 700 780 890 920 940 1,740 3,270 3,320 4,760 15,130

analysis because of their higher level of supplier development activities as compared to service firms (Krause and Scannell, 2002). Targeted informants were the most highly ranked purchasing, logistics or supply chain management executives (e.g. vice presidents or department heads) in their companies. These informants are likely to have an overarching, boundary-spanning view of their companies’ supplier development practices (Hallenbeck et al., 1999). The questionnaire items and the survey instrument were developed based on the literature (in particular on Krause, 1997; Krause and Ellram, 1997b; Krause et al., 2000; Monczka et al., 1993) and the case studies. A number of practitioners commented on the items included in the questionnaire as well as the questionnaire format. The survey items used for the current research are listed in the Appendix. Several response inducement techniques were used prior and subsequent to mailing out the questionnaires (Dillman, 1978; Jobber, 1986). For example, all informants (in many instances their assistants) were contacted via telephone beforehand and informed about the purpose and procedure of the survey, the letter was personalized and addressed to the specific executive, and all participants received a copy of the study results free of charge. From the 691 firms targeted, the responses of 173 were finally used for this study. None of the 178 returned questionnaires had to be set aside from the analysis due to incomplete information, and only five were set aside because they were completed by retailers or distributors and hence did not fall in the predefined industry classification. The effective response rate was 25 per cent. The 173 firms represent a wide range of industries: 20 per cent were in machinery; 15 per cent in food or tobacco; 12 per cent in electrical or electronics; 12 per cent in chemicals and pharmaceuticals; 7 per cent in the automotive industry; 6 per cent in the metal and fabricated metal industry; 5 per cent in construction; 5 per cent in plastics or rubber; 4 per cent in pulp or paper; 4 per cent in optics or precision mechanics; 3 per cent in oil; 3 per cent in minerals; stone or glass; 2 per cent in textiles or clothing; and 2 per cent in wood products or furniture. On average, annual sales of the responding firms were e1.62 billion and the average number of employees was 5,356. The informants held positions as heads of purchasing departments (61 per cent), heads of logistics or materials management departments (21 per cent), vice presidents (9 per cent), and purchasing managers (9 per cent). 4. Data analysis and results 4.1 Direct supplier development Survey respondents were presented with a list of direct supplier development activities that was compiled based on the existing literature (Krause, 1997; Krause and Ellram, 1997b; Monczka et al., 1993) and was augmented through the case study interviews. They were asked to indicate the degree to which their firms are engaged in these activities on a five-point Likert scale ranging from 0 ¼ not at all to 4 ¼ very intensive. The mean of 1.13 is far below the scale average, indicating that firms in Germany, Switzerland and Austria are generally still very hesitant to commit resources to direct supplier development. This result corresponds to Monczka et al.’s (1993) observation that firms are very reluctant to directly develop suppliers. Their interpretation is that Western firms have not been accustomed to direct supplier development. Next, exploratory factor analysis was performed. The basic idea of this technique is that variables belonging to a common factor have some of their structure determined


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by an underlying common dimension. The Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy, which tests whether the partial correlations among variables are small, was sufficiently large to justify factor analysis (KMO ¼ 0:784). The results of the factor analysis of direct supplier development variables yielded two factors, or dimensions. The two factors explain 62 per cent of the variables’ variance and all variables load significantly on their factors. Factor loadings, means and standard deviations of individual variables and composite dimensions are all shown in Table II. The variables included in the first factor involve the human resource and know-how commitment of the buying firm. Most frequently, firms give process-oriented advice to their suppliers, for example regarding machine set-up, manufacturing processes, or quality management practices (mean ¼ 1:99). The supplier of air-conditioning and roof systems has transferred quality engineers, who previously reported to the quality management department, to supplier development, now reporting to the head of purchasing. Frequent tasks are to give advice to suppliers on how to apply quality management practices such as kaizen or statistical process control (SPC). The transfer of know-how to suppliers (1.70) and strategic advice (1.58) are also important. Several case study firms reported that these supplier development practices are particularly important for small and medium-sized suppliers. The power generation plant manufacturer supports suppliers with their project management, on-site installation work or documentation, for example. The car manufacturer’s efforts to help suppliers to get a foothold in China is an example of firms supporting their suppliers in their market entry efforts (1.08). The practice of (temporarily) transferring staff to suppliers is also included in the factor “human”, but rarely used (0.63). Overall, the mean for the factor human is 1.41. The second factor consists of items pertaining to the transfer of capital resources to the supplier. The factor mean of 0.47 shows that firms are extremely reluctant to provide such support to their troubled suppliers. This is consistent with a previous study performed in the United States. The activity “investment in the supplier’s operation” was rated 4.66 on a scale of 1-5, where 1 ¼ always to 5 ¼ never (Krause, 1997). The interviews also revealed that all case study firms would provide capital resources to suppliers only very rarely. Exceptions mentioned were, for example, to finance tools or equipment needed to manufacture the buying firm’s products.

Activities

Table II. Direct supplier development activities

n

Factor loadings Human Capital

Means and SD Composite Activities measures Mean SD Mean SD

Process-oriented advice Know-how transfer Strategic advice Support of market entry Transfer of staff

170 171 170 170 170

0.787 0.811 0.812 0.698 0.655

0.226 0.268 0.235 0.228 0.465

1.99 1.70 1.58 1.08 0.63

1.13 1.04 1.19 1.05 0.96

1.41

0.82

Financial support Investments in supplier

170 171

0.370 0.191

0.840 0.833

0.57 0.37

0.83 0.67

0.47

0.64

Notes: Extraction: principal components; rotation: Promax with Kaiser normalization

4.2 Indirect supplier development The list of indirect supplier development items was also derived from the literature (Krause, 1997; Krause et al., 2000; Monczka et al., 1993; Prahinski and Benton, 2004) and the case studies. On a five-point Likert scale ranging from 0 ¼ not at all to 4 ¼ very intensive, the respondents rated the use of 15 indirect supplier development items. As expected, the overall mean of the 15 items is, at 1.92, significantly higher when compared to 1.13 for the direct supplier development activities. As with direct supplier development variables, an exploratory factor analysis was also performed for indirect supplier development. With a Kaiser-Meyer-Olkin (KMO) measure of 0.827, factor analysis can be attempted. The analysis resulted in four uniquely interpretable factors. The explained variance of these four factors was 74 per cent. Table III shows the factor loadings, means and standard deviations of individual variables and composite dimensions. The variables that load high on the first factor are the firm’s efforts to evaluate suppliers in an ad hoc manner on various performance parameters, and hence this factor was denominated as “ad hoc”. The factor mean is 1.98. Items for formal evaluation of performance and the evaluation of supplier performance shortcomings on firm performance are summarized in the factor “formal”. As such, while the first factor is a measure of occasional supplier evaluation or evaluation in response to unforeseen problems (e.g. delivery problems, quality problems), the second factor is a measure of regular, planned and proactive supplier evaluation. With an average of 2.33, firms are more actively evaluating their suppliers formally than on an ad hoc basis. The first two factors express the frequency and content of a firm’s supplier evaluation practice. The third and fourth factors are associated with how the firm evaluates suppliers and communicates with them. As such, the variables that load high on the third factor (“evaluation”) cover the firm’s supplier evaluation system and process. They relate to the adaptation of the system to the company’s particular characteristics, the level of detail and the feedback of evaluation results to suppliers. The mean for factor three is at 2.00 exactly, i.e. at the scale average. The fourth factor comprises activities such as the communication of the firm’s strategic targets to suppliers, supplier days and awards and is termed “communication”. While firms intensively communicate their strategic targets to key suppliers (2.10), firms in German-speaking countries rarely conduct supplier days (0.88) or make supplier awards (0.58). 4.3 Associative relationship between supplier development dimensions Direct supplier development is usually preceded by indirect supplier development activities (Giunipero, 1990; Krause et al., 1998). It has been shown that indirect supplier development is an enabler for direct supplier development (i.e. has only an indirect effect on performance). Direct supplier development, however, performs “a direct and critical role in achieving performance improvement” (Krause et al., 2000, p. 49). As such, the buying firm should build the decision to conduct direct supplier development on a supplier evaluation system. In their empirical study, Krause et al. (2000) found that firms which evaluate their suppliers formally and based on defined criteria and procedures, and which communicate the evaluation results, are more successful with their subsequent direct supplier development activities. Additionally, a formal supplier evaluation system is also important for controlling the supplier’s progress in improving performance (Krause and Ellram, 1997a, b; Krause, 1999).


157 159 158 156 173 172 173 172 168 173 173 172 172 172 170

cost product delivery technology

Ad hoc Ad hoc Ad hoc Ad hoc

Formal product Formal cost Formal delivery Formal technology Impact on firm performance

Tailored system Feedback of results Detailed system

Firm’s strategic targets Supplier days Supplier awards

0.034 0.011 0.054

2 0.048 0.057 2 0.047

0.017 0.061 0.043 0.045 0.288

0.897 0.945 0.931 0.824

Ad hoc

0.401 0.272 0.195

0.497 0.432 0.442

0.864 0.837 0.835 0.858 0.675

0.090 0.075 0.110 0.148

Formal

0.245 0.370 0.274

0.893 0.780 0.887

0.617 0.481 0.649 0.440 0.039

20.107 20.042 0.009 20.048

Factor loadings Evaluation

Notes: Extraction: principal components; rotation: Promax with Kaiser normalization

n

Table III. Indirect supplier development activities

Activities

0.732 0.845 0.777

0.312 0.554 0.253

0.269 0.192 0.299 0.344 0.335

2 0.027 0.056 0.141 0.071

Communication

562

2.10 0.88 0.58

2.35 1.85 1.78

2.63 2.61 2.42 2.06 1.92

2.15 2.04 1.97 1.72

1.22 1.15 1.11

1.15 1.15 1.14

1.20 1.27 1.23 1.23 1.20

1.39 1.30 1.31 1.21

1.19

2.00

2.33

1.98

0.93

1.01

1.01

1.18

Means and SD Composite Activities measures Mean SD Mean SD

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To examine whether the relationship between indirect and direct supplier development also holds true for firms in the sample at hand, bivariate correlations of the two direct and the four indirect supplier development dimensions were calculated (see Table IV). The correlation results are interesting and help to shed more light on the firms’ supplier development practices. First, there is no relationship between ad hoc evaluation and other supplier development dimensions. Second, if performance gaps are evaluated formally, i.e. on a regular basis with predefined criteria, suppliers are supported more frequently with human (r ¼ 0:51) and capital (r ¼ 0:19) resources. The data reveals similar significant associations for the dimensions “evaluation” (r ¼ 0:42 and 0.20, respectively) and “communication” (r ¼ 0:54 and 0.23, respectively). In general, indirect supplier development measures are more strongly related to the support with human resources as compared to the support with capital resources. While all case study firms utilized some sort of supplier evaluation system, only half of the firms evaluate their suppliers regularly and formally. The silicon wafer manufacturer, for example, compares a supplier’s performance with various criteria, and benchmarks different suppliers with each other and with the firm’s own performance targets. The firm uses criteria to evaluate suppliers ranging from technological capabilities to the worldwide availability of after-sales service. Based on these evaluations, the silicon wafer manufacturer develops so-called “supplier roadmaps” and uses them to check whether suppliers are capable and committed to fulfilling the firm’s current and future expectations. Supplier roadmaps highlight the criteria for which supplier improvement measures are necessary. One of the automotive electronics suppliers combines the following sub-processes to the primary supplier management process: . supplier pre-selection; . supplier selection; . supplier evaluation; and . supplier development.


The combination of these four processes – which includes the supplier development process – indicates that indirect and direct supplier development dimensions are strongly related and conducted consecutively in corporate practice. In summary, the results from the quantitative and qualitative inquiries show that several indirect supplier development activities (formal, evaluation, and communication) are closely linked with direct supplier development activities (human and capital support).

Human Capital Ad hoc Formal Evaluation Communication a

Human

Capital

Ad hoc

Formal

Evaluation

Communication

1.00 0.37a 0.09 0.51a 0.42a 0.54a

1.00 2 0.04 0.19a 0.20a 0.23a

1.00 0.13 2 0.06 0.02

1.00 0.54a 0.41a

1.00 0.45a

1.00

Note: Correlation is significant at the 0.01 level (one-tailed)

Table IV. Correlation matrix

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Figure 1. Industry structure mapping

4.4 Industry pattern Another intriguing perspective in the investigation of differences in the use of direct supplier development activities currently being employed by firms in German-speaking countries takes us to the industry level. For the following analysis, the mean for each branch of industry was calculated for the two dimensions of human and capital support. The mapping of these dimensions gives a properly differentiated picture across industries (Figure 1). The two axes intersect at the overall average for the two dimensions (1.41 for human support; 0.47 for capital support), i.e. industries mapped above the intersection on the x-axis conduct supplier development through human support above average, and industries mapped above the intersection on the y-axis conduct supplier development through capital support above average. From the 14 branches of industry mapped, four assembly industries exhibit above-average supplier development through human and capital support, namely the automotive, machinery, construction, and metal/fabricated metal industries. This positioning is consistent for the automotive and high-tech machinery firms studied in the qualitative portion of this research. As such, the car manufacturer, the air-conditioning and roof system supplier, and one automotive electronics supplier have dedicated supplier development departments in place. Hence, they invest resources for the long term, possess supplier development processes and procedures, and conduct highly professional supplier development. Construction firms ranked highest in terms of capital support. This might be obvious, as suppliers and sub-contractors in the construction industry frequently suffer from cash-flow problems. In order to avoid bankruptcy of sub-contractors, which can be risky for the completion of a construction project, construction companies might have to provide them with financial backup. The New Basel Capital Accord (better known as “Basel II”), which seeks minimum capital requirements, might also gain influence. Suppliers

to the machinery and metal/fabricated metal industry are likely to be supported by their customers when it comes to tool design and construction. Sometimes, such firms finance their suppliers’ tools and retain ownership. As can be seen in Figure 1, firms from the optics/precision mechanics, electro/electronics, chemicals/pharmaceuticals and wood products/furniture industries develop their suppliers through human support below average and through capital support above average. Firms in these industries cooperate with rather small suppliers – when compared with suppliers in the automotive industry, for example. And these suppliers are more likely to require capital support in order to stay in business. Therefore, it might be necessary that the buying firm provides capital support more frequently in order to maintain a competitive supply chain. Finally, suppliers are developed below average with respect to both dimensions in six industries. Firms in the textiles/clothing, plastics/rubber, pulp/paper, food/tobacco and minerals/stone/glass industries all belong to process or primary industries. Many firms in these industries do not yet consider supplier management – and hence supplier development – an important capability. Instead, these firms frequently rely on arm’s-length supplier relationships, competitive bidding, and spot-market transactions. For supplier development to be successful, however, long-term cooperative buyer-supplier relationships are vital. Firms in the assembly industries (i.e. automotive, machinery) purchase for the most part equipment and fabricated materials and firms in the primary industries (i.e. minerals, stone, glass) purchase predominantly raw materials. That is, the categories of goods purchased may possibly influence the buying firm in their decision to engage in supplier development. Furthermore, the diametrically opposed positions of the firms from the assembly industries versus the firms from the primary industries reflect the industries’ supplier management capabilities (Dyer and Singh, 1998; Wagner and Boutellier, 2002). On the whole, this industry perspective yields interesting insights with respect to the supplier development activities across industries. The proposed interpretations, mainly based on the case study interviews, however, are tentative and justify further investigation. 5. Implications and outlook The goal of the current study was to further explore the relationships between various dimensions of supplier development and to investigate supplier development from the perspective of European industrial firms. In particular, six dimensions of supplier development have been analyzed, that is, four indirect dimensions (identified as ad hoc, formal, evaluation, and communication) and two direct dimensions (identified as human and capital). From the results of these analyses and their discussions, several implications can be concluded. Most important, consistent with supplier relationship management research (Cannon and Perreault, 1999; Noordewier et al., 1990), all case study firms have recognized that supplier management is strategically important for the overall success of their firms. The management of supplier relationships can, for example, be a distinct advantage for a firm, one that in turn contributes to sustainable competitive edge and high profitability. Supplier development is considered as one important building block in firms’ supplier management practices. Some recent empirical studies have confirmed that supplier development can have a positive impact on product,


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supplier and firm performance (De Toni and Nassimbeni, 2000; Krause et al., 2000; Prahinski and Benton, 2004). Hence, with industrial firms still being very hesitant when it comes to developing suppliers in their supply chains, they are advised to intensify their supplier development activities, implement appropriate structures and processes, and invest human and financial resources in supplier development efforts. With suppliers making a significant contribution to a company’s competitive position, it would be a fatal mistake if companies were to neglect the potential of supplier development practices. Second, some industries, such as automotive and high-tech, have already embarked on the journey of providing active support to their suppliers. They demonstrate a higher level of commitment to overcoming supplier performance problems. Outsourcing to suppliers, partnering with other firms in a supply chain and building up global supply networks have a long history in these industries (Hines, 1994; Lamming, 1993; Womack et al., 1990). Firms from the process and primary industries, however, still have a long way to go. These firms have to become more professional in their supplier management practices as markets become less protective, customer demands higher and competition stronger. The facilitation of supplier partnerships and consistent supplier management practices will be vital. Benchmarking with and learning from the more advanced industries might be economically justified in today’s competitive business environment, where “supply chains compete against supply chains”, instead of “firms against firms” (Rice and Hoppe, 2001). Third, as supplier development through human resource commitment is highly correlated with how suppliers are evaluated and how firms communicate with their suppliers, a firm should first tailor its supplier evaluation criteria to the firm’s requirements. It can be seen from the case studies that evaluation criteria are contingent on the industry, production approach (e.g. process manufacturing versus unit production) and product type (e.g. product or service). Next, supplier strategies should be developed, indicating the role of the supplier, targets, joint measures and projects, and such. Supplier strategies are also important to specify which suppliers are considered as “A” or “key” suppliers and how they are to be treated differently from other suppliers. For example, in the event of supplier performance problems, supplier development might only be viable for key suppliers, and supplier switching might be the option for other suppliers. Overall, firms should plan direct supplier development measures thoroughly, obtain improvement targets through a formal supplier evaluation, communicate goals to suppliers and provide feedback about performance improvements regularly. This exploratory research sheds some light on current supplier development practices in Europe. However, there are promising research challenges to be tackled in order to further enhance the understanding of supplier development. First, this study was intentionally limited to larger firms. Caution must be used when generalizing the findings to smaller firms. Smaller firms might lack the processes and structures to identify performance gaps and can be even more reluctant to invest the financial and human resources into supplier development efforts. Including small and medium sized enterprises in future research would help to explain not only differences in supplier development based on industry but also on firm size. Second, the study was confined to the buying firms’ perspective. The only dyadic study, carried out by Forker and colleagues, surveyed suppliers of one electronics and

one aerospace firm and compared the buyer and supplier perceptions of the buying firm’s supplier improvement efforts. In essence, they found that there was little agreement regarding the buyer’s supplier development activities (Forker et al., 1999; Forker and Stannack, 2000). Future dyadic studies should not only investigate the buyers’ and suppliers’ agreement regarding the customer’s extent of supplier development practices, but also other important questions, such as the influence of goal congruence or inter-organizational trust. Third, the causal link between the dimensions of supplier development and different types of improvement (e.g. cost, delivery performance, product quality, product innovation) would be worth investigating. Firms could better understand which supplier development practices to apply in order to achieve a desired outcome. From a strategic perspective, which supplier development practice best supports the firm’s product strategy (i.e. cost leadership or differentiation strategy), thus contributing to competitive advantage? Fourth, an effort to calculate the profit impact of the various supplier development dimensions presented in this article is also needed. Related to this, the issue of supply chain improvement for the good of all companies versus the value appropriation obligation of the individual firm is of pressing concern. Similar to the management of profits in channels of distribution (Jeuland and Shugan, 1983) the question is, how investments in the development of suppliers and the resulting benefits are shared in a supply chain setting, i.e. among several firms in a value chain? Finally, the proper implementation of supplier development strategies requires firms to set up structures and processes. As “structure follows strategy” (Chandler, 1962), it is vital to understand, how supplier development practices are best implemented in everyday organizational practice. Should supplier development be departmentalized or conducted through cross-functional teams? How should joint buyer-supplier improvement teams be set up and managed? How can qualitative aspects of such inter-organizational processes, such as mutual support or commitment to the project be achieved? These and similar questions on the operational level have not yet received sufficient research attention. References Bessant, J. (2004), “Supply chain learning”, in Westbrook, R. and New, S. (Eds), Understanding Supply Chains: Concepts, Critiques, Futures, Oxford University Press, Oxford, pp. 165-90. Blenkhorn, D.L. and Banting, P.M. (1991), “How reverse marketing changes buyer-seller roles”, Industrial Marketing Management, Vol. 20 No. 3, pp. 185-91. Bonoma, T.V. (1985), “Case research in marketing: opportunities, problems, and a process”, Journal of Marketing Research, Vol. 22 No. 2, pp. 199-208. Cannon, J.P. and Perreault, W.D. Jr (1999), “Buyer-seller relationships in business markets”, Journal of Marketing Research, Vol. 36 No. 4, pp. 439-60. Carr, A.S. and Pearson, J.N. (1999), “Strategically managed buyer-supplier relationships and performance outcomes”, Journal of Operations Management, Vol. 17 No. 5, pp. 497-519. Chandler, A.D. Jr (1962), Strategy and Structure: Chapters in the History of the Industrial Enterprise, MIT Press, Cambridge, MA. Cunningham, M.T. (1980), “International marketing and purchasing of industrial goods – features of a European research project”, European Journal of Marketing, Vol. 14 Nos 5/6, pp. 322-38.


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De Toni, A. and Nassimbeni, G. (2000), “Just-in-time purchasing: an empirical study of operational practices, supplier development and performance”, Omega, Vol. 28 No. 6, pp. 631-51. Dillman, D.A. (1978), Mail and Telephone Surveys: The Total Design Method, Wiley, New York, NY. Dyer, J.H. (1996), “Specialized supplier networks as a source of competitive advantage: evidence from the auto industry”, Strategic Management Journal, Vol. 17 No. 4, pp. 271-92. Dyer, J.H. and Nobeoka, K. (2000), “Creating and managing a high-performance knowledge-sharing network: the Toyota case”, Strategic Management Journal, Vol. 21 No. 3, pp. 345-67. Dyer, J.H. and Singh, H. (1998), “The relational view: cooperative strategy and sources of interorganizational competitive advantage”, Academy of Management Review, Vol. 23 No. 4, pp. 660-79. Eisenhardt, K.M. (1989), “Building theories from case study research”, Academy of Management Review, Vol. 14 No. 4, pp. 532-50. Ellram, L.M. (1996), “The use of the case study method in logistics research”, Journal of Business Logistics, Vol. 17 No. 2, pp. 93-138. Forker, L.B. and Stannack, P. (2000), “Cooperation versus competition: do buyers and suppliers really see eye-to-eye?”, European Journal of Purchasing & Supply Management, Vol. 6 No. 1, pp. 31-40. Forker, L.B., Ruch, W.A. and Hershauer, J.C. (1999), “Examining supplier improvement efforts from both sides”, Journal of Supply Chain Management, Vol. 35 No. 3, pp. 40-50. Frazier, G.L., Spekman, R.E. and O’Neal, C.R. (1988), “Just-in-time exchange relationships in industrial markets”, Journal of Marketing, Vol. 52 No. 4, pp. 52-67. Giunipero, L.C. (1990), “Motivating and monitoring JIT supplier performance”, Journal of Purchasing and Materials Management, Vol. 26 No. 3, pp. 19-24. Golden, P. (1999), “Deere on the run: quick response manufacturing drives supplier development at John Deere”, IIE Solutions, Vol. 31 No. 7, pp. 24-31. Hahn, C.K., Watts, C.A. and Kim, K.-Y. (1990), “The supplier development program: a conceptual model”, Journal of Purchasing and Materials Management, Vol. 26 No. 2, pp. 2-7. Ha˚kansson, H. (Ed.) (1982), International Marketing and Purchasing of Industrial Goods: An Interactive Approach, Wiley, New York, NY. Hallenbeck, G.S. Jr, Hautaluoma, J.E. and Bates, S.C. (1999), “The benefits of multiple boundary spanning roles in purchasing”, Journal of Supply Chain Management, Vol. 35 No. 2, pp. 38-43. Handfield, R.B., Krause, D.R., Scannell, T.V. and Monczka, R.M. (2000), “Avoid the pitfalls in supplier development”, Sloan Management Review, Vol. 41 No. 2, pp. 37-49. Hartley, J.L. and Jones, G.E. (1997), “Process oriented supplier development: building the capability for change”, International Journal of Purchasing and Materials Management, Vol. 33 No. 3, pp. 24-9. Heberling, M.E., Carter, J.R. and Hoagland, J.H. (1992), “An investigation of purchases by American businesses and governments”, International Journal of Purchasing and Materials Management, Vol. 28 No. 4, pp. 39-45. Heide, J.B. and John, G. (1988), “The role of dependence balancing in safeguarding transaction-specific assets in conventional channels”, Journal of Marketing, Vol. 52 No. 1, pp. 20-35.

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gives strategic advice to suppliers; supports suppliers in their market entry efforts; . transfers staff resources to suppliers. Capital – My firm . . . . provides financial support to suppliers; . invests in supplier firms. Ad hoc – My firm . . . . evaluates suppliers’ cost performance in an ad hoc manner; . evaluates suppliers’ product performance in an ad hoc manner; . evaluates suppliers’ delivery performance in an ad hoc manner; . evaluates suppliers’ technological performance in an ad hoc manner. Formal – My firm . . . . evaluates suppliers’ product performance in a formal manner; . evaluates suppliers’ cost performance in a formal manner; . evaluates suppliers’ delivery performance in a formal manner; . evaluates suppliers’ technological performance in a formal manner; . evaluates the influence of supplier performance shortcomings on our firm’s performance. Evaluation – My firm . . . . uses a supplier evaluation system tailored to our firm’s peculiarities; . gives regular feedback of evaluation results to suppliers; . uses a highly detailed supplier evaluation system. Communication – My firm . . . . communicates our firm’s strategic targets to key suppliers; . conducts supplier days; . assigns supplier awards. . .

(2)

(3)

(4)

(5)

(6)

About the author Stephan M. Wagner is Professor of Business Administration and the Kuehne Endowed Chair of Logistics Management at WHU – Otto Beisheim Graduate School of Management, Vallendar, Germany. Prior to joining academia, he worked for ten years as Head of Supply Chain Management for a Swiss-based packaging technology group and as senior manager for an international top-management consulting firm. He obtained a MBA from Washington State University and a PhD and Habilitation degree from the University of St Gallen. His general research interests lie in the areas of supply chain strategy, inter-firm relationship management, and innovation management in supply chain settings. He has published articles in the Journal of Management, the Journal of Purchasing & Supply Management, the Journal of Supply Chain Management, and Industrial Marketing Management, among others. Stephan M. Wagner can be contacted at: [email protected]

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