Forging new links in the supply chain

Manufacturers have learned to work closely with their suppliers to decrease costs and reduce time to market, but focusing on buyer-supplier relationships may no longer be enough to achieve competitive advantage. Thomas Choi, a W. P. Carey professor of supply chain management, is spearheading new research that examines the relationships between a firm's suppliers. He and his co-authors have discovered that sometimes a company's procurement and manufacturing success — and ultimately, its bottom line — is affected by the ability of its suppliers to work together effectively.

Thanks to outsourcing and offshoring, U.S. manufacturers compete on an entirely different business playing field than they did just a few decades ago. The focus for manufacturers today is on decreasing costs and reducing time to market — goals they achieve largely by partnering with suppliers for everything from basic parts supply to technology innovation, product design, and logistics services.

These changes have elevated procurement's status in the supply chain. More and more companies look to purchasing and sourcing strategies as a way to cut costs, mitigate risks, and increase supply chain control. But while manufacturers and academics have spent ample time investigating how buyers can work with suppliers to better achieve their objectives, focusing solely on buyer-supplier relationships may not be enough to achieve a competitive advantage.

New research spearheaded by Thomas Choi, professor of supply chain management at the W. P. Carey School of Business, suggests that examining relationships between a buying company's suppliers can yield valuable information. How effectively a company's suppliers work together has a significant impact on the buyer's procurement and manufacturing success — and ultimately, its bottom line.

Exploring New Ground

"Buyers need to pay attention to supplier-supplier relationships — it's like the new management frontier," Choi says. "Because of the reduced size of the supplier base, many companies now outsource their design activities and may ask two or more suppliers to work together in new product development. "Also, when one supplier develops a new technology, that supplier may be asked to disseminate the technology to other suppliers [working with the same buyer]," he adds.

Being able to understand, predict, and manage supplier-supplier relationships has become critical for the success of buying firms, yet it is still a relatively new topic of research. The fact that buying companies sometimes ask their suppliers to collaborate while at other times pitting them against each other signaled to Choi that the hidden supplier-supplier dynamics deserved further exploration.

"Supplier-supplier relationships occur in a more complex context than buyer-supplier relationships," he explains. "Suppliers are competitors, but they have to collaborate sometimes. They have to wear different hats and behave differently depending on what the situation calls for." This unique combination of cooperation and competition among suppliers is a critical component of much of Choi's findings.

In two separate studies, Choi and his counterparts focus on defining different types of supplier-supplier relationships, determining buying firms' roles in establishing and maintaining these supplier-supplier dynamics, and pinpointing the relationships' impact on both buyer and supplier companies.

Archetypal Relationships

By thoroughly examining existing literature on buyer-supplier relationships, Choi and his co-authors construct three distinct archetypes of supplier-supplier relationships — defined as competitive, cooperative, and "co-opetitive." In the first study on this topic, Choi collaborated with Balaji R. Koka, a colleague at the W. P. Carey School, and Lisa Ellram, now at Colorado State University, and Zhaohui Wu of Oregon State University.

Their paper, published in IEEE Transactions on Engineering Management, was awarded an honorable mention as one of the best papers of the year. Recognizing the different dynamics of supplier-supplier relationships, however, is just the first step for buyers who want to maximize supplier relationships. Manufacturers must learn to successfully create and manage the archetypal supplier-supplier relationship that best serves their own business goals. The type of relationship a manufacturer chooses to foster between suppliers depends largely on the type of goods it purchases, according to Choi et al.

"Generally, competitive supplier-supplier relationships are appropriate for leveraged items [such as machined components and logistics services] or non-critical items [including peripheral electronic components and package delivery services], whereas cooperative supplier-supplier relationships may be appropriate for bottleneck items [substrates and specialized molding parts, for instance] and strategic items [such as vehicle tooling systems and testing equipment]," Choi explains.

"Co-opetitive supplier-supplier relationships work well when two suppliers have similar capabilities, but supply complementary items — for example, both are automotive molding suppliers, but one supplies the cover for a center console, and the other supplies the instrument panel," he adds. Of course, slotting two suppliers into the type of relationship that works best for the buyer is easier said than done.

Though suppliers often cede to buyers' wishes to continue receiving their business, they are competitive companies in their own right, and may feel threatened, for example, by the information-sharing necessary in a cooperative supplier-supplier relationship. "Generally, buyers do have a great deal of control over suppliers; after all, buyers are the ones paying the bills. But things happen — a buyer may tell suppliers to work together, and they may resist it," Choi explains. "Buyers have to figure out how to respond to this sort of emergent situation."

Conversely, too much supplier-supplier cooperation can result in collusion against the buyer. For example, several flour-producing mills supplying the same bakery could impose a fixed price on flour, which causes a competitive disadvantage for the bakery, Choi and his co-authors explain in the IEEE paper.

In this instance, the bakery would need to adopt a different strategy to manage its suppliers, perhaps creating a more competitive dynamic between them to decrease their collective power. Not surprisingly, the outcome of each supplier-supplier relationship is difficult for buyers to predict — Choi and his team found advantages and disadvantages with all three relationship dynamics. Generally, competitive supplier-supplier relationships allow buyers to maintain a healthy degree of control by limiting the information exchange among suppliers.

The lack of supplier synergy, however, can force buyers to spend time coordinating information on new ideas, quality control, and product processes from each supplier. For cooperative supplier-supplier relationships the trade-off is this: free knowledge-sharing among suppliers means buyers ultimately receive products improved by collective brainpower, and can hedge against capacity shortages because more than one supplier has the necessary information to produce what the buyer needs.

But the open atmosphere holds the possibility of collusion. Co-opetitive supplier-supplier relationships bring the best and worst of both worlds. Buyers potentially gain the benefits of both competitive and cooperative relationships — but also risk taking on double disadvantages.

Suppliers in the Real-World

What happens when these relationships are taken out of the "lab" and into the real world? Choi delves further to explore how supplier-supplier dynamics play out in corporate America in his second study, based on extensive research into eight buying companies — in industries as diverse as pharmaceuticals, automotive, and aerospace — and their various suppliers' interrelationships. This research, conducted in tandem with Wu, was named the best paper of the year by The Journal of Operations Management.

Interestingly, risk mitigation emerges as the primary driver for the way buyers attempt to construct relationships among their suppliers in the real world. Buying companies in the case-study examples all wanted to add suppliers if they had only one source, in order to reduce supply risk. And though cost-cutting is always the corporate mantra for manufacturers, they can do more to impact cost through their own relationships with suppliers.

To decrease supply risks, the focus must be on suppliers' interaction with one another. "Risk mitigation in supplier-supplier relationships deals with issues such as capacity sharing," explains Choi. If one supplier cannot produce everything a buyer needs, or if its capacity is affected by a supply chain disruption, it helps the buyer if another supplier can step in to meet demands. It is hard for manufacturers to know whether or not this capability exists within their supply base if they are not keeping tabs on their supplier-supplier relationships. Generally, buying companies have mixed results fostering the supplier-supplier relationships they desire.

By strategically molding its suppliers' relationships, for example, one peripheral electronic components manufacturer in Choi's study reduced its supply lead-time, improved product quality, and reduced price. Another manufacturer, a vehicle tooling systems producer, reduced reliance on its key supplier and cut down its supply risk. On the flip side, Choi cites a plastic injection molding company which suffered a series of managerial blunders when it tried to manipulate supplier-supplier relationships to reduce reliance on its principal supplier.

Ultimately, it funneled back to its original supplier all the jobs it had tried to transfer to the second company. While there is no secret sauce for making intended supplier-supplier relationships thrive, it helps for buyers to have strong existing relationships with their suppliers. "If buyers want two suppliers to work together, the buyers first need to have a good working relationship with those suppliers. Otherwise, whatever they try to do may backfire," Choi says. "The key is to observe closely what is going on between suppliers," he continues. "The biggest pitfall is to assume that suppliers will do exactly what buyers tell them to."

Bottom Line:

• Supply chain research has examined buyer-supplier relationships, but the dynamics of supplier-supplier relationships is just now being explored.
• Supplier to supplier relationships can be categorized into three distinct archetypes: competitive, cooperative, and "co-opetitive."
• Manufacturers must learn to successfully create and manage the archetypal supplier-supplier relationship that best serves their own business goals.
• The dynamics of supplier-supplier relationships are complex, and buying companies have mixed results fostering them.
• Developing strong relationships between buyer and supplier continues to be the first step.

Because they are angling for the same business from a buying company, suppliers in competitive supplier-supplier relationships tend not to communicate or share information with one another, while those in a cooperative supplier relationship work closely together, exchange information freely, and may even engage in joint-venture projects to meet buyer needs and further their own business goals.

The hybrid "co-opetitive" supplier-supplier relationships display characteristics of both competitive and cooperative relationships. Suppliers in these situations exist in a sort of "mixed-motive" structure, competing when necessary for survival, but cooperating with other suppliers in order to learn and expand their market share.