The Strategic Value of Buyer-Supplier Relationships

Akbar Zaheer is Assistant Professor ofStrategic Management and Organization at the University of Minnesota. He earned hisPh.D. degree from the Massachusetts Instituteof Technology. Dr. Zaheer’s research interestsinclude the competitive advantage fromsupplier relationships, strategic alliances, and interfirm networks.

Bill McEvily is Assistant Professor ofOrganizational Behavior and Theory atCarnegie Mellon University. He earned hisPh.D. degree from the University ofMinnesota. Dr. McEvily’s research interestsinclude the role of regional and nationalinstitutions in facilitating innovation andinterfirm collaboration among small firms.

Vincenzo Perrone is Professor ofOrganization at Bocconi University in Italy.He earned his Ph.D. degree from BocconiUniversity. Dr. Perrone’s research interestsinclude the role of personnel attitudes insustaining the competitive advantage of firms;networks; and trust within and between firms.

20

The Strategic Value of Buyer-SupplierRelationships

BY

Akbar Zaheer, Bill McEvily, and Vincenzo Perrone

IN BRIEFThis research investigates the determinants and outcomes of trust inbuyer-supplier relationships. Trust in a partner organization and inthe individual counterpart are examined from both the buyers’ andsuppliers’ perspectives. The method in which organizational andinterorganizational management practices influence trust in buyer-supplier relations and how trust at two levels relates to supplier per-formance are discussed. Data for the statistical analysis was gatheredfrom a survey of 99 purchasing managers and their lead suppliers.

INTRODUCTION

T he business environment has become intensely competitive, withheightened competition from both domestic and global arenas.Firms, searching for any source of competitive advantage in order

to survive and grow in this new environment, have focused on the sup-ply chain and, more generally, on the buyer-supplier relationship. Thereis ample evidence, both from the U.S. and from Japan, that buyer-supplier relationships can provide a strategic source of efficiency andeven competitive advantage if managed appropriately. Critical toextracting competitive advantage from buyer-supplier relations, how-ever, is a fundamental shift in perspective, away from an arm’s-length,adversarial view of the buyer or supplier, toward a more trust-based,partnership orientation.

This research study was initiated with a view to understanding thebroader changes taking place in buyer-supplier relationships in somemanufacturing sectors of U.S. industry and particularly, the role of trustin these relationships. A unique feature of this study was obtaining datafrom both sides of the buyer-supplier pair. The National Association ofPurchasing Management (NAPM) assisted the research by providing amembership mailing list.

THE ROLE OF TRUST IN BUYER-SUPPLIER RELATIONSHIPS

As firms shift from arm’s-length to closer buyer-supplier relationships,they are discovering the unique challenges associated with jointly

International Journal of Purchasing and MaterialsManagement © Copyright August 1998, by theNational Association of Purchasing Management, Inc.

The National Association of Purchasing Management kindly provided access to a membershipmailing list which made this study possible.Module 4

coordinating value-adding activities in the supplychain.1 Closer strategic partnerships between firmsoften entail investments in assets that are cus-tomized to the buyer’s or seller’s requirements.2

These investments increase the level of depen-dency between the parties and exposes them togreater risk of exploitation. Further, a long-termorientation and the uncertainty associated withfuture unknowns create the need to protect invest-ments against exploitation.3 As a result, buyers andsuppliers must develop procedures and practices forefficiently managing their relationship in a way thatallows them to derive the benefits of closer collabo-ration while minimizing the risks of exploitation.4

Trust is one factor that has been strongly sug-gested as having an important role in facilitatingcloser buyer-supplier relationships by reducing thetendency of firms to take advantage of each other.5

It is beyond the scope of this research to provide acomprehensive review of the meaning of trust.6 Forthe purposes of this research, trust in the buyer-supplier context is the belief that an actor: (1) canbe relied upon to fulfill obligations,7 (2) willbehave in a predictable manner, and (3) will act andnegotiate fairly when the possibility of exploitationexists.8

In a buyer-supplier situation where the behaviorof purchasing managers and supplier contacts isnested within their respective organizations, inter-actions take place not only between individualsbut also between organizational agents in boundary-spanning roles. In such a situation, organizationalculture, structure, and policies are also likely toaffect the level of trust in the partner’s organization.Thus, organizations are vehicles through whichindividual-level behavior is directed, constrained,and facilitated in a way that promotes or inhibitstrust in buyer-supplier relationships.

At the same time, the processes and routinesjointly developed by buyers and suppliers to managetheir relationship also influence trust in buyer-supplier relationships. These management practicesbecome codified and stable over time and create aset of common expectations about the terms of therelationship and what is considered appropriateand fair behavior.

Taken together, a buyer’s and a supplier’s ownorganizational practices and the joint i n t e r o r g a n i z a -tional practices used to manage their relationshipcollectively determine the level of trust betweenthem. In turn, the level of trust in buyer-supplierrelationships is an important driver of the perfor-mance of supplier relations.9

RESEARCH METHODS

Data were collected by means of interviews withpurchasing managers. On the basis of the initialinterviews, a draft questionnaire was developed

and tested for comprehension and clarity amongsta group of purchasing managers and supplier rep-resentatives who were then excluded from thefinal sample. A group of purchasing managers wasidentified at random and their participation wassolicited. At the same time, they were asked to ranktheir suppliers and indicate the names and addressesof their f o u r t h - l a r g e s t suppliers in order to randomizethe buyer-supplier relationships under investigation.Of the 1,050 purchasing managers initially contacted,153 were accepted for this research. Questionnaireswere sent to these 153 purchasing managers, the sup-plier representatives they indicated, and to a secondorganizational respondent from the buyer’s organi-zation. Responses were received from 325 respon-dents for a final response rate of 71 percent (i.e.,325/459). Of the 325 completed questionnairesreceived, 120 were from purchasing managers, 120were from supplier representatives, and 85 werefrom a second respondent in the purchasing organi-zation. Completed questionnaires from both sides ofthe relationship were returned by 99 of the 153 dyadss u r v e y e d .

The participation rate of approximately 15 percent(i.e., 153/1,050) is somewhat low and suggests thepotential for non-response bias. A telephone survey of 100 randomly selected non-participants was con-ducted to determine if there were any systematic dif-ferences between the sample and the remainder of thepopulation. Specifically, the telephone survey investi-gated whether the characteristics of non-participatingfirms deviated systematically from those of the partici-pating firms for those purchasing managers meetingthe requirements of participation. Statistical tests for differences in the means of participating and non-participating firms on certain key variables were car-ried out. No statistically significant differences werefound in the mean size of firms, the length of thebusiness relationship with the supplier company, orsatisfaction with the buyer-supplier relationship,s u g g e s t i n g that non-response bias may not be a signif-icant issue with the data.

For the responding firms, the average buyercompany has 6,457 employees, while the businessunit surveyed has 1,555 employees, although therange was wide. The supplier firms in the samplewere typically smaller, with total employees of4,744 in the company and 320 in the business unitunder study. On average, buyer firms reportedannual sales of $164 million whereas supplier f i r m sreported sales of $77 million. The correspondingfigures for the relevant business units were $111million for the buyer firm and $24 million for thesupplier firm. The principal industries covered bythe buyer firms in the sample are electrical equip-ment, defense and aerospace, computers andperipherals, and miscellaneous manufacturing.Supplier firms participated mainly in the electricalequipment, fabricated metals, and miscellaneousmanufacturing, although a number of supplier

International Journal of Purchasing and Materials Management, Summer 1998

The Strategic Value of Buyer-Supplier Relationships 21

firms were distributors rather than componentmanufacturers.

The remainder of this article begins by highlightingrecent trends in the management of buyer-supplierrelations. Next, an analysis of how some of thesepractices translate into superior supplier perfor-mance and increased satisfaction is presented. Thefollowing section focuses on factors contributing tothe development of trust in the buyer-supplierrelationship. The conclusion summarizes the keyfindings and their relevance for the managementof buyer-supplier relations.

MAJOR TRENDS IN SUPPLIER RELATIONS

Major trends in supplier relations are reported in thissection, beginning with overall business unit perfor-mance for both buyer and supplier firms, and the per-formance of the relationship. High levels of trust arereported by both buyer and supplier firms towardtheir exchange partners. Recent developments such asJIT and TQM have become widespread, but EDI(Electronic Data Interchange) remains underutilized.

Business Unit Profitability. In general, 65 per-cent of the buyer firms in the sample reported thatbusiness unit profitability for the current year wasbetter than the previous year. The correspondingfigure for supplier firms is 72 percent.

Performance of the Buyer-Supplier Relation-ship. Of the total sample of buyer firms, 87 percentreported satisfaction with the buyer-supplier rela-tionship. The corresponding figure for supplierfirms was 82 percent. Supplier performance wasbased on a combined scale comprised of competi-tive pricing, high quality supply, timeliness ofdelivery, and flexibility, as reported by the buyer.On this dimension, 85 percent of the buyersreported values of five or above on a seven-pointscale ranging from very poor (1) to excellent (7).

Trust. Of the buyer firms, 85 percent reportedagreement or strong agreement with statementsabout supplier organization trustworthiness. Thecorresponding figure for the supplier organizationis 76 percent. In other words, 76 percent of sup-plier firms reported agreement that buyer firmswere trustworthy. Figure 1 (see page 23) illustratesinterorganizational trust from the standpoint ofthe buyer and supplier firms.

When asked about the trustworthiness of the indi-vidual counterpart in the supplier organization, 76percent of purchasing managers agreed that the con-tact person was trustworthy. From the standpoint ofsuppliers, 72 percent expressed agreement with state-ments about the trustworthiness of the contact per-son from the purchasing organization. Further, asFigure 2 (see page 23) suggests, the degree of consis-tency between the assessment of trust between theexchange partners is greater for interorganizationaltrust than for interpersonal trust.

Supply Management. Just over half of the buyerfirms, 53 percent, reported that they rely heavilyon TQM policies to manage their supplier relation-ship. Similarly, 60 percent of the buyers indicatedthat JIT practices with the supplier are beingactively pursued. However just 17 percent of thebuyers reported that EDI was being used at all inthe buyer-supplier relationship. Figure 3 (see page24) illustrates the breakdown of the extent of use ofthese practices (1 = not at all, 7 = to a great extent).

The trend toward a declining number of suppliersis very much in evidence as illustrated by Figure 4(see page 25). From a mean of 4.6 suppliers for thespecific component three years ago, the meannumber of suppliers dealt with in the last year forthe component has been reduced by 33 percent to3.1. As many as 82 percent of the buyers indicatedthat they used three suppliers or less for the com-ponent last year as opposed to 66 percent threeyears ago who used three suppliers or less. Whenchecking for sources of more competitive supply, 86percent of purchasing managers reported that threeor fewer suppliers were contacted.

SUPPLIER PERFORMANCE DETERMINANTS

In this section critical determinants of supplier per-formance as well as the determinants of satisfac-tion with the supplier relationship are identified.In particular, the trends identified in the previoussection are related to performance in order toascertain whether adoption of these supply chainmanagement practices and others is associatedwith superior supplier performance or buyer satis-faction with the relationship.

Trust as a Performance Determinant. Perhaps themost powerful determinant of supplier performancewas the degree to which members of the buyer orga-nization trusted the supplier organization, which, forthis research, is termed “interorganizational trust —buyer”. Both supplier performance and satisfactionwith the supplier relationship were strongly associ-ated with interorganizational trust — buyer [correla-tions of 0.65 (p<0.01) and 0.58 (p<0.05) respectively].The extent to which the individual purchasing man-agers or buyers trusted their supplier counterpart,“interpersonal trust — buyer” was also measured.Interpersonal trust — buyer was also significantlyrelated to both satisfaction and performance, but muchless strongly than interorganizational trust [correla-tions of 0.36 (p<0.01) and 0.30 (p<0.01) respectively].Further, when controlled for interorganizational trust— buyer, the interpersonal trust — buyer did notaffect satisfaction in any way, although it showed aweaker but still significant correlation with p e r f o r-mance [0.1 and 0.2 (p<0.05) respectively]. These findingssuggest that interorganizational trust is the more criticaldeterminant of satisfaction and performance,although interpersonal trust and interorganizationaltrust are themselves related [correlation 0.35( p<0 . 0 5 ) ] .


22 The Strategic Value of Buyer-Supplier Relationships



BUYERS AND SUPPLIER TRUST LEVELS

FIGURE 1

INTERORGANIZATIONAL AND INTERPERSONAL TRUST

FIGURE 2

35

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00 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7

Differences in Level of Trust

■ interpersonal■ interorganizational

Level of Trust

■ Supplier■ Buyer

When the same set of statistical relationshipswere examined from the supplier side of thebuyer-supplier tie, quite different results werefound. “Interorganizational trust — supplier,” orthe extent to which the members of the supplierorganization trusted the buyer organization, wasin fact related to performance, just the same asinterorganizational trust — buyer. However, thelink was rather weak, though significant [correla-tion 0.22 (p<0.05)], and only with performance, notsatisfaction. On the other hand, there was no statis-tical link between “interpersonal trust — supplier”with either performance or with satisfaction.

The extent to which trust held in common, orjointly held by buyer and suppliers, influencedperformance or satisfaction was not examined.Here the analysis showed that the only commonlyheld interorganizational trust was significantlyassociated with performance [correlation 0.27(p<0.01)], but not interpersonal trust. It thusbecomes clear that the overall orientation of anorganization toward its exchange partner is mostimportant for superior performance, and while theindividuals involved make a difference, this effectis dwarfed by that at the interorganizational level.Further, joint interorganizational trust betweenbuyer and supplier firms, or mutual trust, is alsoimportant for performance.

Supply Management Trends and Performance.Some of the recent developments in supplier relationships, such as the use of TQM, EDI, andJIT, showed an insignificant link with supplier

performance. However, these practices were notinvestigated in detail. Nevertheless, only the use ofTQM showed a statistically significant relationshipwith buyer satisfaction [correlation 0.20 (p<0.05)].

DETERMINANTS OF TRUST

Since trust is such a critical determinant of perfor-mance, it is important to investigate factors thatare associated with high-trust relationships. Putdifferently, organizational and interorganizationalpractices that create trust are to be encouraged anddeveloped in order that, in turn, trusting inter-organizational relations may develop. The organi-zational practices investigated are the degree ofautonomy of the buyer or purchasing manager,and the extent to which other departments influ-ence purchasing decisions. Interorganizationalpractices and characteristics investigated are thedegree to which the buyer and supplier firmsshare information, the length of the business andpersonal relationships between the buyer and sup-plier firms, and the extent to which there exists apartnership orientation on the part of the buyerand supplier firms, referred to as “common fate.”

Organizational Practices as Determinants ofInterorganizational Trust. The degree to whichthe organization permits the buyer autonomy indecision-making and action was found to be statis-tically related to interorganizational trust — buyer(correlation 0.34 p<0.01) However, buyer auton-omy was not related to interoranizational trust



USE OF SUPPLY MANAGEMENT PRACTICES

FIGURE 3

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70

60

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01 2 3 4 5 6 7

Use of JIT, TQM, and EDI

■ JIT■ TQM■ EDI

from the perspective of the supplier. The extent towhich other departments influence the actions anddecisions of the buying department, on the otherhand, has a negative effect on the build-up ofinterorganizational trust (correlation -0.44 p<0.01),reinforcing the previous finding of greater buyerautonomy being associated with greater interorag-nizational trust.

Interorganizational Practices as Determinantsof Interorganizational Trust. The length of thepast business relationship between the two individ -uals managing the relationship on either side of thebuyer-supplier dyad appeared to be an importantfactor in the build-up of trust between the twoorganizations [correlation from the buyer’s side:0.39 (p<0.01)]. However, the length of the businessrelationship between the two organizations appearsto be less important, at least from the point of viewof the buyer (no significant correlation). On theother hand, from the point of view of the supplier,the length of the business relationship does affectthe extent of interorganizational trust, althoughnot to the same degree as interpersonal trust [correlations: 0.23 (p<0.05) and 0.33 (p<0. 0 1 ) ,respectively].

Information sharing practices (as reported by thesupplier) contribute quite strongly to interorgani-zational trust — supplier, but not interorganiza-tional trust — buyer [correlations: 0.32 (p<0. 0 1 )and 0.05 (non-significant) respectively]. The part-nership orientation, captured by the notion of

being bound together by a “common fate” affectedinterorganizational trust — buyer, but not inter-organizational trust — supplier [correlations: 0.21(p<0.05) and 0.01 (non-significant) respectively].Much greater commonalty of perceptions wasfound in the extent to which the partners workedtogether, labeled “joint action.” Joint action mea-sured by the buyer led to trust in the supplierorganization, as well as trust by the supplier in thebuyer organization [correlations: 0.33 (p<0.01) and0.28 (p<0.01), respectively].

CONCLUSION

The results of this study have significant implica-tions for managers. A key finding of this study isthat trust matters. In particular, the level of inter-organizational trust is a powerful influence onsupplier performance. The results further suggestthat interorganizational trust, which is likely to bedetermined by the institutionalized practices androutines that shape the context for interfirmexchange, is a more critical determinant of sup-plier performance than trust between individualsmanaging the interorganizational relationship. Ofthe factors considered, only the past duration ofthe interpersonal relation is related to trust, whichlends weight to the role of the history of past inter-actions in developing trust.

Overall, this suggests that the effects of individuallevel factors may be reduced by the addition of



CONSOLIDATION OF SUPPLY CHAINSFIGURE 4

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01 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 >20

Number of Suppliers

■ Past Year■ 3 Years Ago

organizational and interorganizational factors thatmay influence trust development. Moreover, theresults suggest that in the context of buyer-supplierrelationships where roles are institutionalized to acertain degree, individual characteristics are lessimportant determinants of trust.

An important managerial implication of thisstudy is that, to some extent, managers can pur-posely “engineer” the level of interorganizationaltrust. In other words, managers do not have to waitfor trust to develop spontaneously out of specificinterpersonal relationships, protracted over time.Instead, by appropriately modifying relevant internalpolicies and structures of their organizations, man-agers can influence the level of interorganizationaltrust and, consequently, the performance of thesupplier relationship.

REFERENCES1. E.J. Zajac and C.P. Olsen, “From Transaction Cost to

Transaction Value Analysis: Implications for the Studyof Interorganizational Strategies,” Journal of ManagementStudies, vol. 30, no. 1 (January 1993), pp. 131-145.

2. O.E. Williamson, Markets and Hierarchies (New York: TheFree Press, 1975).

3. P.S. Ring and A.H. Van de Ven, “Structuring Coopera-tive Relationships Between Organizations,” S t r a t e g i cManagement Journal, vol. 13 (1992), pp. 483-498.

4. O.E. Williamson, The Economic Institutions of Capitalism:Firms, Markets, Relational Contracting (New York: TheFree Press, 1985).

5. N. Luhmann, Trust and Power (Chicester: Wiley, 1979); P.Bromiley and L.L. Cummings, Transactions Costs inOrganizations with Trust (Discussion Paper No. 128),Strategic Management Research Center, University ofMinnesota, 1992.

6. See for example J.D. Lewis and A.J. Weigert, “SocialAtomism, Holism, and Trust,” The Sociological Quarterly,vol. 26, no. 4 (1985), pp. 455-471.

7. E. Anderson and B. Weitz, “Determinants of Continuityin Conventional Industrial Channel Dyads,” M a r k e t i n gScience, vol. 8 no. 4 (1989), pp. 310-323.

8. J.C. Anderson and J.A. Narus, “A Model of Distributor Firmand Manufacturing Firm Working Partnerships,” Journal ofM a r k e t i n g, vol. 54 (January), pp 42-58.

9 . A. Zaheer, B. McEvily, and V. Perrone, “Does Trust Matter?Exploring the Effects of Interorganizational and Interper-sonal Trust on Performance,” Organization Science, vol. 9, no. 2 (March-April 1998).



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The Strategic Value of Buyer-Supplier Relationships