Week 5

• Supplier development is any activity initiated by a buying organization to improve the performance of its suppliers

• More specifically, supplier development has been defined as any effort by an industrial buying firm to improve the performance or capabilities of its suppliers

• it encapsulates two of the most evident features of social capital: shared knowledge and shared asset investments

Perhaps U.S. firms have been reluctant to invest in supplier development due to a perceived lack of immediate return on investment associated with deploying the resources required to make it successful. Alternatively, perhaps U.S. firms work in different ways to improve supplier performance

In these situations, the buying firm may arguably be prepared to help the supplier through information sharing, technical assistance, training, and direct investment in supplier operations, in return for the benefits of improved performance and joint value creation. In return, the supplier firm may be expected to share information, dedicate human resources to the improvement effort, and invest in specific equipment.

• buying firms must determine what knowledge and resource investments are likely to yield benefits.

• appropriate controls should be established to assure that these investments are made. If the appropriate mechanisms are not in place, the supplier may not perceive the benefits associated with these investments and may reject the initiative to modify or improve their processes

• if a buyer asks a supplier to invest in relation-specific assets but is not willing to do the same, it is unlikely that the supplier will be willing to make these investments and the expected rents will not accrue

cost, quality, delivery time and reliability, and flexibility

• cost

  • Improvements in the cost of products for buying firms are dependent partially on improvements by their subcomponent suppliers, for example, on reductions in rework, scrap, and downtimes. As suppliers reduce their costs, the benefits should be at least partially transferred to their industrial customers in the form of lower prices

  • In high-tech computer markets, producers increasingly outsource production and distribution to suppliers in an effort to reduce the cost of new technology

• quality

  • The quality of inputs from some suppliers is still problematic, and the quality of component parts affects customers’ perceptions of quality in the final product. Some suppliers may not have adequate engineering and technical resources for quality assurance, which sometimes results in quality problems and production delays

• delivery time and reliability

  • Effective performance in both facets of delivery, may partly explain why companies like Dell have had success in reducing supply chain costs, such as minimizing the amount of buffer inventory they must hold.

• flexibility

  • Assemblers’ flexibility can be expected to be a function of their own suppliers’ quality, delivery time, reliability, and flexibility. In other words, suppliers must be able to meet changes in quantity requirements, provide timely delivery of products on short notice, and produce smaller production runs at more frequent intervals

• When buying firms are unwilling to commit to longterm relationships and to make investments to improve suppliers’ performance, suppliers may be unwilling to commit to resource investments that are relationship specific

• However, when buying firms signal a commitment to a long-term relationship and indicate a willingness to make investments in key suppliers to help them improve performance, buyer performance would also be expected to improve.

structural, cognitive, and relational.

structural dimension is related to social capital resulting from the structural configuration, diversity, centrality, and boundary-spanning roles of network participants.

• The cognitive dimension of social capital refers to the resources that provide parties with shared representations, interpretations, and systems of meaning. They also suggested that shared meanings, such as shared values and goals, develop through an ongoing and self-reinforcing process of participation in sense making processes as the parties construct a shared understanding

• A firm cognitive capital is embodied in a shared vision, i.e., collective goals and aspirations of the parties, and is present when partners have similar perceptions of common goals and how they should interact. When goals and values are shared by buyers and their key suppliers, continued interactions should result in an ongoing and self-reinforcing process of participation in sense making as the parties interact and socially construct a shared understanding. If goals are shared, buyers and suppliers can be expected to have a shared understanding of what constitutes improvement and how to accomplish it.

• the relational dimension refers to personal relationships that develop through a history of interactions, i.e., the extent to which trust, obligation and reciprocity exist between the parties.

• as the level of interaction between alliance partners increases, organizational routines are established and the investment in cospecialized assets and level of bilateral dependence also increases

• Experience with a partner is said to raise collaborative expectations and stimulate learning and readjustment cycles as the relationship evolves.

• Trust tends to increase with the length of the relationship between buyers and suppliers.

• Furthermore, a prior history of cooperation between firms has been found to reduce their expectations of opportunism

• Through repeated interactions the parties appear to develop trust in one another such that they may no longer need to rely on formal contacts to ensure performance

• Relationship-specific communication and coordination routines develop over time, partners with first-hand knowledge of each other’s capabilities are more effective in assigning tasks to the most capable party, and that through multiple interactions buyers and suppliers develop a common language for discussing technical and design issues

Such routines are fundamental to any supplier improvement effort initiated by a buying firm. Knowledge shared by buying firms includes both the transfer of factual knowledge, such as sharing of production schedules, and the transfer of tacit, ‘‘sticky’’ knowledge, such as technology roadmaps and shared values

• Information sharing in this literature has typically been defined as ‘‘the degree to which each party discloses information that may facilitate the other party’s activities’’

• In collaborative buyer–supplier relationships, attitudes toward learning are noncompetitive, which can be expected to lead to greater symmetric learning than in other forms of alliances. Furthermore, in a supplier development context we can expect information exchanges between key suppliers and buyers to be more detailed, intricate, and proprietary than in arm’s-length relationships

• Supplier development activities such as regular visit to suppliers’ facilities and supplier training

• Supplier development activities, especially those dubbed ‘‘direct involvement’’ activities, are much more complex than short-term contracting and as such buyer performance should be improved by matching diverse communication requirements with different methods of information sharing

• ‘direct involvement’’ supplier development activities provide more personal, face-to-face interactions with their suppliers and thus should be more successful in transferring tacit knowledge and accrue performance improvements as a result of their investments because the ambiguity of tacit knowledge requires thicker information exchange

• commitment between the two firms is an important complementary condition to establishing performance goals, and provides value to buying firms that seek social capital accumulation with suppliers

• the different dimensions of social capital have unique effects depending on performance goals: cost and total cost, versus quality, delivery, and flexibility.

• cognitive capital in the form of shared values, and relational capital in the form of buyer and supplier dependence, were important in explaining buyer performance achievements in cost and total cost.

• Performance outcomes in quality, delivery and flexibility appear to depend more on ‘‘direct involvement’’ supplier development activities than cost performance outcomes.

• a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another

• In interorganizational relationships, trust denotes an exchange partner’s expectation that the other party can be relied on, will behave as predicted, and will act fairly

• Calculative trust informs expectations by deliberately and rationally assessing forward-looking conditions: It requires calculations of benefits and costs, and hinges on the relative values of cheating and cooperation

• Thus, sanctions, the expected payoffs of rewards over the penalties, decrease opportunistic behavior, regulate exchanges, and preserve cooperation

• Ongoing interaction lets parties accumulate experiences, form expectations of each other, and develop shared values and normative conventions that define how parties will work together

• Relational trust arises when social relations evolve to a state in which each partner can expect to act according to the other’s preferences and priorities

• With high relational trust, partners develop a mutual understanding and shared identity in which they “‘think like’ the other, ‘feel like’ the other, and ‘respond like’ the other”

• The central logic underlying calculative trust is incentives, a rational assessment of well-structured rewards and punishments. Accordingly, calculative trust relies on a forward-looking decision rule: a continual reassessment of relative payoffs for whether it pays to cooperate. This decision rule requires deliberate processing and accuracy.

• Relational trust is anchored in the past, arising from repeated interaction. A shared identity is the strongest form of social attachment that may develop as parties consider each other’s interests as if they were their own. As a decision rule, relational trust functions as a heuristic, a shortcut to rational assessment, based on the overall quality of the relationship rather than each single transaction

• Asset specificity: refers to customized investments specific to the exchange made by one party that cannot be deployed for alternative uses.

  • Buyer asset specificity, which means the buyer has invested in supplier-specific assets and risks sizable sunk costs if the exchange is terminated. Since these assets cannot be redeployed to other transactions, the supplier may hold up the buyer.

• Market uncertainty: refers to unpredictable changes in external environments

  • Supply market uncertainty, which refers to unpredictability in supply prices, vendor support, and the supplier’s manufacturing technologies and product design. Because uncertainty creates instability that is difficult for managers to understand and respond to, it challenges exchanges by requiring adaptation

• Behavioral uncertainty: refers to the extent to which one party cannot effectively observe or evaluate the activities of the other party. When behavioral uncertainty arises, the other party is more likely to misbehave or not disclose information in order to maximize self-gain

  • when the buyer cannot readily observe and verify supplier activities, the supplier can hide actions such as undersupplying effort or ignoring critical processes or requirements

• exchange partners try hard to meet performance goals only when noncompliance delivers a penalty, the most severe of which is exchange termination

• When partners believe rewards and punishment are well specified for the particular transaction, the benefits derived from executing the specified task outweigh the net costs from not doing so

• This motivates each party to fulfill its performance obligations. As a forward-looking logic, calculation implies that buyers and suppliers will assess the rewards and punishment for each new transaction, proceeding only when the transaction projects net gains

• When relational trust exists, the buyer and its supplier hold common beliefs and commitment to the partnership. These beliefs harmonize interests, curtail potential opportunistic behavior, and motivate exchange parties to comply with and commit to joint goals

• The buyer does not need to continually monitor the other, collect information, fully examine the current situation (e.g., construct if-then scenarios), and reassess the relationship. The supplier thus has the autonomy to make decisions on behalf of both parties that fulfill its performance expectations.

• When there is calculative trust:

  • When a buyer has not invested in supplier specific assets, the buyer can easily switch to an alternative supplier should its performance be low. As a result, if the perceived rewards over punishment are high, suppliers are motivated to achieve explicit performance targets because any is conduct is tied to negative economic consequences while meeting performance goals are rewarded, including renewed business

  • when buyer asset specificity is high, it creates a situation of asymmetric dependence—the buyer cannot exit the relationship without considerable out-of-pocket costs. Such sunk costs reduce the effectiveness of calculative trust

• When there is relational trust:

  • a buyer’s investment in supplier-specific assets a credible signal of commitment, not an asymmetry to be exploited

  • Furthermore, with relational trust, parties use the “we” heuristic to make decisions in accordance with collective goals.

  • When the buyer credibly commits to the relationship and the supplier reciprocates this goodwill, supplier performance increases.

• With calculative trust:

  • Under low levels of market uncertainty, well-structured rewards and penalties effectively align incentives: parties will find cooperation more valuable than defection because they can obtain stable information to accurately assess the trade-offs. However, if the supplier’s operating environment is highly uncertain, important factors such as pricing, product specifications, and technologies are changing constantly. Thus, the reward structure is less likely to accurately map how uncertainties affect exchange behavior and outcomes, making parties less assured whether cooperation is still favored. As a result, when market uncertainty is high, calculative trust is less effective in enabling continuous adaptation and motivating performance

• With relational trust:

  • Relational trust may be more beneficial when supply markets are uncertain. With relational trust, exchange parties expect to continue to work together and adapt jointly to external changes. This commitment is based on previous interactions that give rise to positive expectations of a shared future

• With calculative trust:

  • When behavioural uncertainty exists, we predict that calculative trust has a stronger impact on performance

  • Unobserved behaviour is disciplined through expected payoffs in which rewards depend on expected outcomes. When behavioral uncertainty is high, it is hard to observe the inputs or activities of the other party

  • With calculative trust, the party’s final output can be evaluated, and rewards and sanctions can be effectively applied. If the buyer detects low-quality output, it can punish the supplier by terminating the business agreement, which causes net losses for misbehavior

• With relational trust

  • a “clan” culture is most beneficial for tasks defined by behavioral ambiguity—the harmony of shared interests and goals aligns joint action, and results in effective task performance. Thus, both parties will align their goals and act to achieve the mutual performance objectives despite the inability to observe the other. the buyer can trust the supplier in good faith even though accurate information about the supplier’s processes and procedures are lacking. In contrast, if “actions could be undertaken with complete certainty,” relational trust is less efficacious

  • However, no support from the research!!!

• Calculative trust has a stronger effect than relational trust

• Because significant human interaction and time are required to develop relational trust, this finding highlights the value of the lower-cost strategy of developing effective control/incentive systems.

  • Possibly, relational trust is more relevant to customers and to service sectors, whereas for buyer-supplier exchanges in manufacturing sectors, calculative trust is more effective at disciplining and directing the supplier’s operational decisions to achieve product performance levels

• Trust represents a cognitive frame that directs problem solving by invoking either a cognitive heuristic (e.g., relational trust) or rational calculation (e.g., calculative trust). Because calculative trust induces performance by aligning incentives through rewards and punishment, a manager’s course of action depends on how well the incentive structure directs desired behavior

• Relational trust drives performance through a social commitment to prioritize joint goals over individual interests—the heuristic “we” simplifies and facilitates ongoing decision making and should be broadly invariant to the typical suspects that derail economic exchange

• Asset specificity and market uncertainty weaken the positive association of calculative trust with supplier performance, but behavioral uncertainty increases it.

• Relational trust has a stronger effect on performance in the presence of specialized assets or market uncertainty

chains whose members are strategically, operationally, and technologically integrated. Underscored by long term relations based on stability yet flexibility

• the degree to which chains are predisposed to [efficiently] detect and fill gaps between what the market desires and what is currently offered

• identifying an authority, generating a common supply chain identity, utilizing boundary-spanning ties, and providing procedural and interactive justice are strategies that facilitate the evolution of a climate of trust and power within strategic supply chains. This climate creates a context within which the behaviors that are necessary to develop cultural competitiveness

Trust is the decision to rely on a partner with the expectation that the partner will act according to a common agreement. Firms accept elevated levels of risk to gain access to social and economic benefits that are associated with trust-based relationships

• trust is viewed as a substitute for costly control and coordination mechanisms (TCE)

• Argues that trust is a relational lubricant, allowing greater benefits of knowledge transfer, joint learning, and the sharing of risks and costs associated with exploring and exploiting opportunities (social capital theory)

• trust in a partner and trust in a situation

• Other types are ‘trust into contractual, competence, and goodwill forms’

  • Contractual trust entails a mutual understanding by partners to adhere to a specified agreement;

  • competence trust stems from the belief that a given partner has the managerial and technical capabilities to properly perform a given set of tasks

  • goodwill trust exists when partners are willing to act in ways exceeding stipulated contractual agreements

Because of bounded rationality, firms cannot predict every potential relational risk. Drafting contracts to account for all potential unforeseen developments is impossible. When an unanticipated contingency surfaces, partners have the option of showing goodwill or selecting a more self-interested mode of action to a partner’s request for changing the contractual agreement

Partners are more willing to exchange knowledge and other resources in an accurate and timely manner when engaged in a trustbased relationship. When norms of reciprocity are established, the expectation exists that a favor will be returned, influencing goodwill behavior.

• An influence that can be used to evoke desired actions from partners. Coercive power concerns actors’ control of negative outcomes relative to each other with the intention of gaining rewards from a partner either through punishment or threatened sanctions

• Coercion is risky, however, as it engenders the possibilities of retaliation and decreased rewards for all partners (Molm, 1997; Rokkan and Haugland, 2002). Non-coercive power is an ability to provide or withhold rewards in promoting desired behaviors. As we will indicate, this reward form of power may serve as a more effective substitute for trust than does coercive power

• Emphasizing coercive power, the theories often explain the detrimental relational effects of interorganizational power but ignore its positive effects on relationships.

• Non-coercive power provides numerous relational advantages, including the ability to overcome a lack of consensus and reach fast decisions, promote innovation and change to address environmental opportunities and threats, influence the adoption of advanced information technologies, and provide legitimacy and stability to a network

• Interdependencies create patterns of dependency, a situation in which firms that own or control valuable, scarce resources hold power over firms seeking those resources to the extent that the dependency is not mutual

• There is always a certain degree of mutual interest between contracting parties. By creating conditions in which the powerful firm would incur significant costs if it were to act opportunistically, the weaker firm leverages the power it possesses to the fullest extent.

• Power in supply chains stems from several sources, including the number of major customers of a supplier’s component, a supplier’s market share of a given component, the number of suppliers from which a buyer purchases a particular component, the number of potential suppliers for a given component, and the amount of revenue a supplier generates from a single buyer

• As one firm places increasing amounts of trust in a partner, the firm actually magnifies the extent to which a partner can act opportunistically.

• Overembeddedness results from fears of disrupting high-trust relationships. Fears possibly stem from an emotional attachment created by developed trust (Mayer et al., 1995) or concerns that the partner may harm the firm’s reputation as a potential partner for future relationships

• Over time the level of diverse knowledge in these relationships stagnates, eventually creating a situation wherein partners are unable to engage in competitive levels of innovation

• Power differentials between partners create opportunities for more powerful firms to act opportunistically by exercising coercion.

• entrepreneurial firms commonly lack the resources required to support a transaction framed around legal actions that are taken to establish and/or enforce their rights

• The complementary nature of trust and power extends from the ability of one to substitute for the other when one fails to achieve desired results.

• While coercive power and goodwill trust do not exist simultaneously in relationships, other forms of trust may concurrently exist with coercive power at any point in time, and non-coercive forms of power may exist at the same time as goodwill trust.

• Firm may voluntarily submit to certain levels of coercive power because perceived benefits still outweigh perceived costs. Here, trust in the situation exists but not trust in partnering firms

• non-coercive power, contractual trust, and competence trust may act as complementary forms of influence. Again, each concerns efficiency and trust in a situation – not trust with firms to work together to achieve mutual benefits. Non-coercive power, as in the form of mutual hostages binds partners to a relationship to a greater degree than a mere contract and increases partners’ trust that the relational contract will be upheld by raising the costs associated with opportunism or negligence.

• Trust in the situation - coercive power

• trust in a situation (contractual trust, and competence trust) - non coercive power

An excessive use of either non-coercive or coercive power may undermine trust in a relationship.

Non-coercive power exists as the ability to withhold resources from a relationship. Withholding resources can dissuade unwanted behaviors and influence desired behaviors. Excessively using non-coercive power in this manner may become perceived as a constraint to the firm’s opportunities and prospects for long-term survival.

Excessively using non-coercive power in this manner may become perceived as a constraint to the firm’s opportunities and prospects for long-term survival.

• Interfirm communication facilitates network-wide knowledge or awareness, which in turn establishes a network-level climate of trust and power

• There is a compelling reason to expect a trust–power climate to be a stronger predictor of performance in supply chains than dyadic level trust and power dynamics. Even for those supply chains that are not strategically aligned, a certain level of knowledge is transferred across firm boundaries.

• Over time these norms and expectations solidify into a trust–power climate that either guides or derails entrepreneurial behavior and associated learning initiatives and cohesion within the network. Therefore, because of the ease of communication across firms, a trust–power climate can be expected to affect performance of integrated networks (such as supply chains) more so than dyadic trust and power

Given their varying purposes and contexts, different supply chains operate successfully with different levels of trust and power. The focus herein is on strategic supply chains, or long-term oriented supply chains in which the partnering firms are highly embedded strategically, operationally, and technologically

The objectives associated with a strategic supply chain include not only short-term goals, such as supplier scheduling, inventory visibility, and capacity planning, but also longer-term efforts to achieve joint flexibility and adaptation. The strategically embedded approach reflects the intention of the firms within the supply chain to integrate their actions and to interactively adjust their behaviors while pursuing opportunities over time.

• concern is with the product and process integration across firms within strategic supply chains.

• Supplier product integration refers to allowing suppliers to assume responsibility for product engineering activities and development of component parts while supplier process integration entails including suppliers to understand the complexity and scope of coordinated processes

‘‘Technologically’’ embedded refers to the sharing of knowledge and capabilities within the strategic supply chain. A lack of knowledge sharing makes it difficult for partners to remain technologically similar and adjust together when market opportunities emerge.

Cultural competitiveness refers to a system of shared values among organizational partners that are committed to consistently fulfilling customer needs through entrepreneurship and learning. An entrepreneurial orientation (EO) facilitates efforts to achieve cultural competitiveness.

• (1) autonomy provided to individual firms

• (2) propensity for each firm to engage in and support innovativeness

• (3) affinity for risk-taking behavior

• (4) the tendency for proactiveness towards future needs or changes

• (5) commonly held interests to enhance the supply chain’s competitive aggressiveness.

the awareness an EO creates leads to more accurate adaptation decisions and behaviors. When cultural competitiveness is successfully implemented, strategic supply chains respond to market opportunities efficiently with flexibility and agility

• Strategic supply chains achieve and sustain cultural competitiveness when there is a balance of moderately high levels of trust and power rather than maximum levels of either trust or power

• Without alignment of all organizations’ interests, supply chain cultural competitiveness suffers. Developing trust through repeated exchanges within the supply chain aligns partners’ interests, increases attachment and the exertion of effort by individual organizations

• Trust also engenders a number of cooperative relationship behaviors such as joint responsibility in problem solving, shared planning, and flexible arrangement to accommodate unexpected situations.

• Power maintains a supply chain’s entrepreneurial orientation and ability to adapt. Non-coercive or reward power can ease the concern of partners when making choices regarding their entrepreneurial behaviors.

• Forming an authority

• establishing a common supply chain identity

• Creating boundary spanning roles

• maintaining organizational justice

The four strategies facilitate forming and maintaining contractual and competence forms of trust. In other words, using these strategies does not automatically equate to the formation of goodwill trust, as goodwill trust develops through repeated transactions based on norms of reciprocity.

Power extending from an authoritative figure is founded on legitimacy of rules rather than reward power (in other words, distributive justice). Therefore, an authority is a efficient substitute to constantly maintaining organizational justice with reward power

There are three general forms of authority—rational, traditional, and charismatic. Rational authority derives from established rules and the given, yet impersonal right for those in positions of authority to exercise power and issue commands. Traditional authority is based upon the sanctity of traditions, and obedience is owed to a legitimate person of status. Finally, charismatic authority exudes from an individual’s exceptional character

• Within groups of firms with varying interests of survival and performance, a lack of consensus can inhibit effective decision processes. An authority possesses the ability to exert power to achieve speed in these decision contexts without disrupting existing levels of trust, as this power is embodied within formal, legitimate rules. An authority provides a legitimate influence without having to establish consensus across partners. In doing so, legitimacy facilitates speed and efficiency in the supply chain decision process.

• Engendering cultural competitiveness within a group of firms with variant motivations is a complex process of coordination. A centralized, influential authority acts as an efficient substitute to having monitoring functions

A common identity leads to greater cooperation and cohesion within a group and heightened competition with those individuals or firms outside of the group

• Certain levels of identification can form immediately merely by recognizing a given categorization

• Identification stems from proactive behaviors promoting desired philosophies and values, regularly scheduled meetings to facilitate knowledge sharing that benefits all those involved, and consulting teams shared across an entire network to enhance learning

• when firms identify with a certain group, they act in a way that benefits those within the group while ignoring or even competing with those outside the group. This reduces the extent to which competence plays a role in the relational trust because firms can rely, to a certain extent, on partners for knowledge and possibly resources in renewing competencies.

• Identification also facilitates the development of goodwill trust.

• Firms sharing a common identity are more willing to overlook actions based on power as the underlying intention of these actions becomes clear.

• Boundary spanners process information from partnering firms and act as representatives of their own firm. Boundary spanning individuals integrate firms strategically. Boundary spanners gather information regarding organizations’ strategic intentions but may also provide informative perspectives of their own firm’s intentions and concerns. Given that strategic supply chains are composed of firms with idiosyncratic objectives and contexts, these roles offer transparency to individual firm actions.

• Transparency is especially beneficial when powerful firms act to influence the entrepreneurial and learning actions within the supply chain

• Assuming the powerful firm’s actions are intended to enhance supply chain efficiency and effectiveness, the information gathered by boundary spanners generates knowledge-based trust. Knowledge-based trust can increase the contractual trust of the interorganizational relationship sufficiently to promote cooperative behaviors.

• justice plays a major role with respect to how trust and power are balanced in this context.

• Distributive justice refers to the perceived fairness and equity of an organization’s rewards as compared to its inputs in a given process

• Procedural justice refers to the fairness of the actual decision-making process, as opposed to the fairness of outcomes as in distributive justice

• Distributive justice facilitates use of power while maintaining levels of trust. Power is possessed by the individual or firm able to offer greater rewards in an exchange

• trust forms in a strategic supply chain when powerful actors distribute rewards fairly following use of their influence

• Ensuring that rewards are distributed fairly demonstrates the powerful firm’s competence. Furthermore, the rewards reflect the reciprocal exchange for the weaker partners’ willingness to be subjected to a partner’s influence.

• Procedural justice similarly enables a greater use of power in interorganizational relations while maintaining given levels of trust.

Supplier has an obligation to fullfil a requirement. Supplier accepts that buyer has a legitimate power to tell what the supplier should be doing

Buyer has knowledge and expertise, supplier then wants to work with buyer.

Similar to mimetic power, follow what the market leader is doing