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European Journal of Purchasing & Supply Management 8 (2002) 71–82

A conceptual model for managing long-term inter-organisational


relationships
Paul D Cousins*
Centre for Technology and Innovation Management (Centaim), School of Management, University of Bath, Claverton Down, Bath,
Somerset BA2 7AY, UK
Received 30 June 2000; received in revised form 12 March 2001; accepted 23 March 2001

Abstract

This paper will discuss the concept of relationship development. It will argue that whilst existing literature focuses on an economic
power relationship this is incorrect. The focus should be based on a concentration on the trade off between the level of dependency
that a firm is prepared to accept, compared to the level of certainty that they perceive to be realistic.
The paper will explore the literature on relationship management and will take several established frameworks and argue that
whilst they have substantial merit their focus is not helpful to relationship implementation and management. A conceptual model is
presented which provides a different way of viewing relationships using the theoretical concept of ‘game theory’. This paper suggests
that relationships are processes and not entities. As such the unit of analysis should be at the product, service or commodity level
and not at the firm level. The approach suggested whilst conceptual, has been developed from several years of research with a variety
of firms across a range of industries; some case studies will be used to illustrate the applicability of the framework. r 2002 Elsevier
Science Ltd. All rights reserved.

y an old woman was walking along a frozen Hines, 1994; Hines et al., 2000). The applications of
path and came across a snake, frozen solid. She these strategies have caused dramatic changes in the
took the snake home and laid him by the fire and nature of the relationships between firms, from a
nurtured him back to health. One day when the traditionally widespread range of suppliers towards
woman was feeding him he turned around and bit fewer suppliers and therefore a greater degree of higher
her! As the women was entering a coma before dependency and complex relationships (Cousins,
death, she asked the snake why he should do such a 1999b). It is with this focus in mind that this paper
thing after she had taken care of him, to which the examines the basis of how organisations can manage
reptile relied, you knew I was a snake when you such complex interactions; a conceptual framework,
helped me! based on Game Theory is developed as a way for firms
to think about how to select and manage competitive
collaborative relationships.
1. Introduction and arguments This paper sets out to argue the following key points:

The literature on inter-firm relationships has grown * Partnership relationships do not exist. Rather there
consistently over the past few years. Academics and are ranges of varying collaborative relationships, all
practitioners have realised that in order for firms to of which are competitiveFa point supported by
become flexible, adaptable and efficient, they must focus other authors in the field.1
their resources on managing the supply process. This * Organisations do not trust each other, they manage
approach has led to firms operating strategies such as risk based on business case decisions.
Outsourcing (Wilcox et al., 1997), Supplier Delegation * A ‘relationship’ is not an entity; it is a process. Like
(Cousins, 1999a) and Supplier Tiering (Lamming, 1993; any process it needs to be focused on a definable

*Tel.: +44-1225-826909; fax: +44-1225-826473.


1
E-mail address: p.d.cousins@management.bath.ac.uk (P.D. Cou- A point supported by other authors such as Cox (1996) on his work
sins). on relational competencies.

0969-7012/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 9 - 7 0 1 2 ( 0 1 ) 0 0 0 0 6 - 5
72 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82

outcome. That outcome can range from cost savings In order to be able to develop a strategic approach to
through to joint product development and problem managing complex relationships, it is necessary to
solving. Once the focus (output) is decided the gain an understanding of the key factors that influence
appropriate relationship can be developed. them.
The development of the collaborative relationships
literature suggests that the much vaunted ‘partnership’
2. The development of a conceptual model for relationship approach has been brought about by firms’ needing to
management reduce costs, following changes in the world’s industrial
and economic climate that have taken place over the last
There is a wide range of literature written on the three decades. The worldwide recession of the late 1980s
subject of relationship management. This literature is and early 1990s has forced firms to look at adding value
very eclectic in its nature covering areas from econom- and reducing cost throughout their entire business. This
ics, strategy and game theory to organisational beha- change has brought about large-scale redundancy
viour. This development can be traced to several programmes or ‘down-sizing’, cost reduction drives,
research areas, a factor which presents some problems quality improvement initiatives and inventory reduction
when attempting to order the development process. programmes (Schonberger, 1986, pp. 155–160; Womack
Table 1 offers a summary of the main literature areas. et al., 1990; Womack and Jones, 1996). Managers have
The main focus of the literature can be divided into been forced to look at new and different methods of
two broad perspectives: firstly, a behavioural or adding value, either through improved performance of
humanistic school of thought. Authors here take the their product or through the development of the ‘service
view that relationships between firms can be viewed on package’ (Normann, 1984) and service delivery system
the same basis as human inter-personal relationships, that surrounds their product. Womack et al. (1990)
which are based on trust, mutual understanding and co- discuss how automobile manufacturers are using the
operation, the adage that ‘‘relationships are like service element of their business to build competitive
marriages’’ is often used.2 The second broad school of advantage by ascertaining customers’ future require-
thought is that of an economic perspective. Here ments, and making them part of their product develop-
authors believe that inter-firm relationships are based ment programme5 (Voss, 1992; Womack and Jones,
on economic power exchanges brought about by the 1996). The key factor of competition, on a global scale,
differing sizes of firms and therefore economic power has been that firms have been prevented from passing
within the market place.3 cost increases onto the consumer in the form of
These perspectives are useful in providing a way to increased market prices (Steudel and Desruelle, 1992).
think about relationship management, however they do Western firms who have looked at the success of their
not provide answers to many of the scenarios that exist Japanese counterparts have seen how they reduce costs
in the ‘real world’, for example, why are some very small with closer working relationships with their suppliers.
organisations able to hold large companies to ransom? They have decided that this must therefore be the way
This situation can be seen particularly in high technol- forward (Burt and Doyle, 1994). However, the major
ogy areas, such as software design, consultancy services theme that is indicative of the current business environ-
and research and development houses (Kay, 1993; Child ment is that firms must reduce their overall costs in
and Faulkner, 1998). This type of opportunistic order to survive and compete.6 This approach suggests
behaviour4 is also witnessed in other industries such as that relationship development should be based on a
automotive, aerospace and retail. It is suggested that the sound business case not on a utopian ideal of working
economic size argument does not appear to explain better together; as Milton Freidman said, ‘‘the business
firm’s behaviour, therefore a different perspective is of business is business’’.
needed. There has been some developmental work on This apparent dichotomy, between short-term price
this problem in the area of game theory (Axelrod, 1984; reduction and long-term collaboration, occurs because
Dixit and Nalebuff, 1993; Nalebuff and Brandenburger, of a misunderstanding by western firms of the very
1996; Axelrod, 1997). This work, however, has pre- nature of the partnership philosophy itself. The philo-
dominantly looked at the interactions between firms and sophical underpinnings of partnering are not based on
does not focus on key business relationships themselves. Japanese culture. They originate, in their most recent

2 5
See Ford and Farmer (1986), also Chao and Scheuing (1992) at For an interesting discussion on manufacturing operations operat-
First PSERG conference, Glasgow, 1992. ing as service organisations, see OMA Conference Paper of Voss
3
This view was first popularised by Porter (1980) and was later used (1992).
6
as the basis for the majority of discussions on relationship theory and Firms often view cost and price interchangeably; however a price
approaches. focused strategy will reduce the suppliers margins, where as a cost
4
Term first used by Williamson (1975) to describe the strategic focused approach examines the cost structure of the products or
interaction of firms within markets. services being purchased and looks for ways to reduce them.
P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82 73

Table 1
Summary of Literature Review on Relationships

Literature area Sub-group Author Contribution

Theory of the firm and Antecedent literature Plato (347 BC) Aristotle Efficiency from specialisation
of inter-firm subcontracting (322 BC)
Physiocrats (17th century) Surplus (capital acc.)
Smith (1776) Division of labour, market transactions
Marx (1867) Reciprocally separate groups (firms)
Neoclassical theory Marshall (1890) Equilibrium analysis
Salter (1980) Firm operates to marginal point
Transaction cost Coase (1937) Firm as a unit of analysis, transaction costs
economics
Williamson (1975, 1985, 1986, The nature of transactions, bounded rationality,
1991) asset specificity, vertical integration
Sako (1990) ACR/OCR, trust
Nishguchi (1994) Asset specific contract assembly/supply
Dyer (1997) Asset specificity in auto industry supply
Criticisms of TCE Klein et al. (1978) Quasi-rent and post-contractual opportunistic
behaviour
Ghosal and Moran (1996) Internal efficiency of firms
Martinez and Dacin (1999) Influence of external regulatory factors
Resource based theory/ Penrose (1959) Firms have specific assets used for competitive
specialisation theory advantage
Andrews (1980) Distinctive competence
Demsetz (1993) Reduction in TCE causes firms to subdivide
Teece (1997) Leverage firm’s internal resources
Behaviouralist literature Cyert and March (1963) How firms make decisions in a market system

Purchasing and supply Marketing perspective Van de Ven et al. (1975) People, not organisations, have goals
literature
Kiser (1976) Buyers choose between horizontal and vertical
market relationships
Jain and Laric (1979) The need to meet a price target defined by the
marketing function drives purchasing strategy
Hakansson (1987) Transactions influenced by atmosphere and
environment
Turnbull and Ford (1996) No such thing as the individual transaction
Olsen and Ellram (1997) Purchasing and marketing are mirror images
Strategic supply Baily and Farmer (1981) Operations based, preceded strategic supply
Owen (1985) A total cost, longer term approach to purchasing
Farmer (1985) Supplier selection critical to firm’s success
Reck and Long (1988) Four stage model of the development of the
purchasing function
Caddick and Dale (1987) Purchasing objectives must be aligned with firm
strategy
Laneros and Monckza (1989) Use Porter’s model to support strategic role of
purchasing
Porter (1980) Five forces model, including determinants of
buyer and supplier power
Reid (1990) Conceptual framework to focus on purchasing’s
supportive role
Cousins (1995) Purchasing as a function becomes more strategic
Carr and Smeltzer (1999) Three indicators of strategic purchasing
Modern supply chain Houlihan (1987) Supply chain as a single entity
management
Ellram (1991) A network of firms delivering product or service
to the end customer
Berry et al. (1994) Supply chain management aims to release
management resources for developing long-
term relationships
Tan et al. (1998) How firms utilise their suppliers’ processes,
technology and capability to enhance
competitive advantage
Carlisle and Parker (1989) Partnerships between customer firms and
suppliers. Three stage model
74 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82

Table 1 (continued)

Literature area Sub-group Author Contribution

Burt and Doyle (1994) Advocate incorporation of elements of the


Japanese keiretsu
MacBeth and Ferguson (1994) Advocate single (or dual) sourcing for its cost,
quality and efficiency gains
Laneros et al. (1995) A systematic approach to managing partnerships
Cox (1997) Collaborative approach is not necessarily more
effective than competitive
Parker and Hartley (1997) Firms not entering long-term
partnershipsFdependency rather than
partnership
Cousins (1999a) In supply base reduction, firms must take account
of strategic and managerial as well as
transaction costs

Auto industry specific literature Supplier relations and Womack et al. (1990) Toyota production and procurement system with
strategy in the auto tiering
industry
Lamming (1987, 1993) Four stage model of procurement, post-Japanese
model of component supply, tiering, lean
supply
Helper (1991) Voice and exit supplier relationships
Sako et al. (1995) Companies with better partnership relations
outperform
Wolters and Schuller (1997) Move to supplier sourced pre-assemblies in
European industry. Complete systems
purchasing a strategy for competitiveness
Ali et al. (1997) Supply strategies of Europeans heavily influenced
by Japanese practices
Brandes et al. (1997) TCE cannot explain move to outsourced sub-
assemblies
Leverick and Cooper (1998) Supplier responsibility for design now prevalent
Mudambi and Helper (1998) Close but adversarial model
Calabrese (2000) Propensity of buyers to reduce fixed costs and
investment rigidity

Outsourcing and strategy Strategy Porter (1980) Benefits and risks of vertical integration
literature
Prahalad and Hamel (1990) Core competency growth focus of firms
Outsourcing Venkatesan (1992) Principles of outsourcing, unit of analysis
Quinn (1994) Knowledge based outsourcing
Chesbrough and Teece (1996) Risks of inadvertently outsourcing true
competencies
Lonsdale and Cox (1998) Review of factors driving outsourcing

form, from Deming’s (1986) 14 points on quality,7 tivity and efficiency and not on profitability per se,
which were developed in the late 1940s. Deming argued something which currently appears to be the main
that firms should work more closely with fewer driving force for western firms in the adoption of this
suppliers, to enable clear and unambiguous commu- approach. A concentration on productivity and effi-
nication flows to take place, allowing buyer, supplier ciency will, according to Deming (and substantiated by
and customer to realise the maximum amount of the subsequent success of Japanese companies today)
synergy from their relationship, and therefore achieve (Womack et al., 1990), lead to overall improvement
competitive advantage for all parties involved in the levels in long-term sustainable competitive advantage
transaction (MacBeth and Ferguson, 1994). The Dem- and profitability (Nishguchi, 1994).
ing ethos is based on timely and acceptable inputs to the
organisation: that is to say a concentration on produc-
3. The changing role of purchasing to supply
7
Deming’s fourth point discusses working closer with fewer
suppliers to ensure on-time delivery, at acceptable price and acceptable The development of the partnership approach and the
levels of quality. drive to reduce cost and add greater value has led firms
P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82 75

to reconsider the role of the purchasing itself. Purchas- It is important to note that such strategic changes
ing has traditionally been seen as a service department cause distinct managerial problems. As Quinn et al.
performing no real ‘strategic’ role (Caddick and Dale, (1988) note strategic movements take place in a step-by-
1987). Numerous studies have been conducted on the step manner or, as they term it, ‘logical incrementalism’.
strategic importance of purchasing and supply to the It is therefore vitally important when considering the
organisation, ranging from Farmer (1978), Farmer implementation of any new strategy that the internal
(1981a, b), Spekman and Hill (1980) and Van Weele infrastructure is firmly in place. This concerns both the
(1984) to Cavinato (1991). These studies have tended to internal resources, such as the correctly qualified
be conceptual (Spekman, 1981; Browning et al., 1983; personnel, and also the relevant management systems
Burt and Soukup, 1985). However, recent studies have and philosophies.
exhibited a large amount of empirical evidence support- The central concept of a relationship approach is
ing the argument that purchasing should be viewed as a concerned with the collaboration and sharing of
strategic function (Laneros and Monckza, 1989; Carl- resources, either physical (such as machinery) or
son, 1990; St John and Young, 1991; Hines, 1994; intangible (such as intellectual know-how, technological
Nishguchi, 1994; Cousins, 1999a). It is clear from this processes)9 as well as the primary goal of gaining
literature that the role that purchasing plays within the competitive advantage through improvements in pro-
organisation is now changing: purchasing as a function duct and process redesign, making both firms more
is becoming more strategic with smaller numbers of efficient in the supply of the end product.10
highly qualified buyers, decentralised control of non- Authors such as Sako (1990), Dore (1987) and
value adding items and greater planning activity Lamming (1993), point out that a portfolio of relation-
horizons. The strategic process of supply management ships is essential; MacBeth and Ferguson (1994, p. 106)
is replacing the function of purchasing. place relationships on a continuum ranging from
In addition to this change, the educational and vertical integration to the pure market. The type of
demographic structure of the purchasing department is relationship operated will naturally depend on the
also changing (Cousins, 1993; Cousins and Rutter, parties involved, the external environmental conditions
1998). Purchasing personnel are now better qualified (Burt and Doyle, 1994, p. 5) and the overall willingness
and more professional in their outlook and approach to to enter into such an agreement. Interestingly, Sako
the task. (1990) uses Williamson’s (1975, 1985) framework to
Furthermore, the same research shows that the analyse inter-organisational relationships,11 leading her
structure of the function is also changing. The size of to develop the arms-length contractual relationship
purchasing departments has reduced significantly from (ACR) and obligations contractual relationship (OCR)
an average of between 50 and 60 buying personnel (in models.12 Sako (1990) also develops the idea of trust, in
medium to large sized organisations) in 1980 to an an economist’s sense, defining it by using three
average of approximately 15 strategic supply personnel categories: Contractual Trust, Goodwill Trust and
in the late 1990s (Cousins and Dooley, 1994; Cousins Competence Trust. These can be summarised as follows:
and Rutter, 1998). This change is often combined with a
decentralised purchasing strategy approach, where * Contractual Trust: The trust that the supplier (or
strategically important contracts are centralised at head other party) will adhere to the points of the contract
quarters and non-strategic important procurement is as agreed. These cover both explicit and implicit
devolved to the various satellite plants and divisions. As agreements.
one purchasing director put it: * Goodwill Trust: The trust that the other party will, if
required, perform tasks in excess of the agreed terms
At British Sugar we only have ten buyers for the and conditions.
entire business, and in fact they are not called buyers, * Competence Trust: The trust that the other party has
they are called ‘Purchasing Programmes Managers’. the ability to be able to produce what the contract
They are all qualified to at least degree standard, and requires.
it is their job to oversee strategic policy making
decisions for all purchases within the businessyDay
to day procurement is handled by administrators at 9
This is often referred to as asset specificity.
plant level, who ‘call off’ from blanket five year 10
The gains in savings from this approach can be astronomical; in
contracts which have been negotiated by us. We only one case study followed by the author a saving of 40% was realised on
handle contracts of a value greater than d125,000y8 a d400 million pound spent by simply focusing on the relationship.
11
Coase (1973) was the first person to develop the theory of TCE in
a seminal paper addressing this vitally important conceptFsee
reference.
8 12
Andrew Wilson, British Sugar, Peterborough, taken from Cousins Note that this work also builds on established theory developed by
(2000). Dore (1987) that examined contractual relationships.
76 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82

These definitions of trust are important and con- In order to build protection from suppliers and their
venient and will be discussed in detail during the expected opportunistic behaviour, organisations built
conceptual model definition at the end of this paper. up large supplier bases. This allowed them to choose
In addition to general writers on the subject of from a multitude of suppliers whenever they had a
relationships another major school of relationship request for parts to be purchased. The goal was to
theory was created in the late 1970s and early 1980s, minimise price by maintaining a large supplier selection.
these became known as the Industrial Marketing and It is important to note that the principal goal was
Purchasing group (IMP). They use Williamson’s (1975) unitaryFthat of price minimisation. Buyers operating in
transactional cost economics model and the work of this traditional purchasing mode adjusted purchasing
Ring and Van De Ven (1992, pp. 483–498) as the basis mix by moving work around a host of eligible suppliers
for their measure of relationship development. Their on a short-term contract basis, a policy which became
focus then, and today, is on the firm operating within a known as ‘multi-sourcing’. Naturally, this prevented
network of relationships. The IMP group clearly suppliers from assuming that they would win the order.
recognise the importance of business relationships and In the minds of the buyers it ‘kept suppliers on their
it is their view that the entire system needs to be toes’. However, this approach also prevented the
considered in a holistic and systematic way, mapping the supplier from being able to plan capacity accurately
various relationships and types of relationships in a (thus obtaining economies of scale) in anticipation of
pseudo mathematical manner. Whilst this process is future requirements. From the suppliers’ point of view,
indeed very useful in determining the type and quantity therefore, doing business with this type of customer
of relationships within a given network, the measure- offered little or no benefits.14 The supplier was not
ment and management of the process is again ignored. required or allowed to suggest innovative ideas, but had
The work of the IMP has had a growing effect on how to work to strict specifications and was subject to the
academics view relationship strategy, by indicating that rigours of sophisticated contractual agreements. All that
relationships between firms are highly complex and the supplier could expect was a squeeze on margins. This
inter-related through many levels of the supply hier- method of procurement, whilst it minimises price via the
archy. request for quotation (RFQ) bidding procedure, also
has the effect of reducing quality levels, service and
delivery schedules. This ‘big stick’ approach (Lamming,
4. Strategic supply and relationship management: new 1987) will only work for a short period of time, after
paradigms which the supplier has to cut corners or look elsewhere
for business. As Deming (1986, p. 33) points out,
The literature review and recent research (see Table 1) purchasers should:
has shown that the purchasing function is now having to
adapt and adopt new strategic initiatives for the yEnd the practice of awarding business on the basis
management of the supply base, ranging from the of price tag alone. Purchasing must be combined with
traditional adversarial approach through to the devel- design of product, manufacturing, and sales to work
opment of complex inter- and intra-organisational with the chosen suppliers
collaboration agreements. This paradigm shift for both
the organisation and the purchasing function requires a
These ‘new’15 purchasing approaches involve the
change in the way that business is approached. Tradi-
development of partnership arrangements, or as Kanter
tional purchasing thinking would dictate that if the
(1989, p. 117) calls it ‘‘becoming better PAL’s’’ (pooling,
supplier is not subject to the firm’s control then it is not
allying and linking). Kanter suggests that these are
going to work for the common good of both buyer and
essential in order to operate a satisfactory partnering
supplier. It is assumed that the supplier will only desire
philosophy. This ‘friendly’ approach to procurement
to achieve one goal: that of self-maximisation.13 In order
contrasts sharply with the adversarial approach, which
to prevent opportunistic behaviour buyers and suppliers
has traditionally been ingrained in buyers, labelled by
need to find ways of developing mutual collaborations,
Hofsteader (see Kanter, 1989, p. 118) as the ‘‘paranoid
i.e. both parties benefit from the exchange process.
style of traditional American management’’. This
MacBeth and Feruguson (1994, pp. 156–159) discuss
attitude has been preserved within the law with such
how this transformation can take place with the
phrases as ‘caveat emptor’ (‘let the buyer beware’), which
development of the RAP-3 framework. They suggest
that change will only occur if it is viewed at both an 14
For a recent discussion on supply base rationalisation and
operational and a strategic level. restructuring see Cousins (1998).
15
Kanter (1989) describes these paradigms as new. As previously
13
A view first expressed by Williamson (1975) where he referred to mentioned, however, they can be traced back to the mid-1940s, and to
suppliers as seeking opportunism with guile. Deming’s 14 points.
P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82 77

has for so long been part of English law (although now The Japanese recognised that the supplier was the
mostly replaced by the Sale of Goods Act 1979). expert in his own field of technology and that they could
draw upon this to create synergies with their own
organisations. This model involves viewing the supplier
as ‘co-producer’, working with fewer suppliers per
5. The Japanese effect on supply management customer and customers per supplier, developing long-
term relationships, managing close interaction among
During the 1980s, western organisations noted that all functions, sharing physical proximity, and blanket
whilst they purchased a large amount of bought-out contracts (Shapiro, 1988; Nishguchi, 1994; Cousins,
parts for their operations, they were considerably less 1998).
competitive than the Japanese. Furthermore, the super-
ior quality of Japanese goods and their supplier
relationships were becoming unmistakable. The Japa-
nese view of procurement clearly involved the supplier
as a ‘stakeholder’ (Cyert and March, 1963) in their 6. The strategic nature of supply
business. Cyert and March defined stakeholders as
either ‘internal’ or ‘external’ to the firm (Fig. 1). The In order to implement and manage these ‘new’
internal stakeholders included managers, trade unions, strategic relationships, firms have adopted (as discussed)
etc., while the external influencers included government, a more strategic approach to supply management.
legislation, suppliers and so on. The principle behind the However, the application of strategies does not make a
‘new’ supply management approach was to consider the business process strategic. Rather it is the pro-activity
supplier as part of the internal stakeholder element. and context within which these strategies are set that
This approach dictates that the supplier will have a produces strategic intent. If firms want to increase
profound effect on the construction and supply of the competitive advantage they must go further than the
buying firm’s product, i.e. the perceived quality and buying process, they must look at how they strategically
reliability of the buying firm’s product is locked into manage the supply process (Harland et al., 1999).
that of the supplying firm’s component parts. More Supply refers to the management of goods and services
importantly, internal stakeholder status should give from the supplier(s) to the customer. It involves an
both firms equal access to information such as build understanding of what the company sees as important,
schedules, forward plans and also limited access to i.e. its strategic goals and intent, the alignment of these
strategic market movements of the firm(s), thus allowing issues and the translation into a supply strategy.
both customer and supplier to act in a symbiotic way to Strategic supply is concerned with structuring the supply
support each other. base to meet the needs of the firm. For example, if the
Since the 1940s Japanese firms have clearly taken the firm needs to improve its time-to-market, increase the
view that the component supplier has an equally innovation cycle and/or cut costs, what is the appro-
important role to play in producing the finished goods priate supply structure to deliver this? Should the firm
as that of the manufacturer. be operating a tier structure of supply, reduce its
oversupply base, outsource elements of its business?
These are all issues for supply management. Further-
more, the management of these strategies is also the
realm of supply. The supply process permeates
across the firm as opposed to sitting within a specific
function.
Fig. 2 represents a conceptual model of the supply
process. It argues that in order to be strategic, supply
must balance all the elements within this model. The
model is concerned with finding the most ‘appropriate’
strategy based on the key five dimensions depicted
within the model. It is the balancing of all of these
elements that the supply strategist must consider.
Selecting one or two of these elements will not deliver
a strategic response. For example, the implementation
of collaborative relationships without the requisite skills
and competencies, measurement systems, etc. will be
doomed to failure, as some firms have found to their
Fig. 1. The stakeholder approach to supplier relationships. cost (Cousins, 1999a).
78 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82

Fig. 3. A dependency and certainty conceptual model of inter-firm


relationships.

value. For example, it could be straightforward cost


reduction or more complex issues such as product
redesign, innovation, improving time-to-market, etc.
Fig. 2. The strategic wheel of supply.
The point is that the relationship process must be
focused on delivering value. Further to this point, the
focus of the relationship needs to be at the product,
7. The development of a conceptual model for relationship service or commodity level, i.e. what does the customer
management require from the supplier for the delivery of the part,
service or commodity item? This argument will mean
When examining the literature on inter-firm relation- that it is very possible, in fact highly likely, that firms
ships from either the behavioural or the economic will be operating a range of differing relationships with
school of thought, one recurrent theme is argued one supplier. The type of relationship adopted will
throughout. That is that the unit of analysis is the depend on the level of output desired, which is generally
relationship between Firms A and B. If this proposition a calculation between the amounts of resources needed
is examined in any detail it is clear that this focus is not versus the level of return anticipated.
correct. Cousins (2000) found that in one case study of a The following model (Fig. 3) is suggested as a way of
single buyer–supplier relationship in the aerospace thinking about the management of these relationships.
industry there were over 1500 interfaces between the Whilst other authors argue (Lamming, 1993; Mac-
firms, on a variety of differing products, service and Beth et al., 1989a, b) that relationships are influenced by
commodities being purchased. It does not make intuitive economic power, which undisputedly has an effect on
sense that there should be one relationship between two the relationship, it is argued that this is only one factor.
firms. Each person, within the case study gave a slightly Indeed it is argued that economic power is a subset of a
(sometimes radically) differing perspective on what they wider relationship influencerFdependency. The issue of
saw as both the ‘health’ of the relationship and the dependency and risk is widely discussed. Axelrod (1964)
desired outcome. The work of Lamming et al. (1996) in was one of the first proponents of this approach
generating the RAP framework suffered from this same producing a game known at the Prisoners Dilemma,
fundamental flaw, which is a misunderstanding of what this was later popularised in the 1990s by Carlisle and
a relationship is and what its key focus should be. Parker in their version called the ‘Red/Blue game’. The
It is proposed here that the relationship should not be principle of the game, however, is the crucial point,
viewed as an entity. Lamming (1993) referred to it as a which is that teams will collaborate if they know that the
‘quasi firm’, sitting between the two organisations. payoff will give them advantage and they will compete
These view points are not helpful in allowing firms when and if they believe that they can gain an advantage
and academics to study this area. Relationships should from doing so. Building on Williamson’s ideas of asset
be viewed as an inter- and intra-organisational process. specificity and the literature on relationship manage-
Like any other process within a firm such as commu- ment there appear to be four distinct categories of
nication, they exist to deliver something, namely value. dependencies: Historic, Economic, Technological and
It is therefore essential that firms focus the relationship Political (see Table 2).
process on a definable deliverable outcome. That out- The second axis on the matrix is labelled certainty.
come could manifest itself in a variety of forms, The concept of certainty comes from the literature on
depending on what the organisation sees as adding economics where it is used to support the definition of
P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82 79

Table 2
A typology of inter-organisational dependenciesa

Dependency Definition of dependency

Historic The parties have always dealt with each other, they know and feel that they can interpret each other’s movesFthey feel
comfortable with the partner even though they may not be the best. They have an established relationship that they feel
that they can build upon
Economic Economic size, one or other party is a significant market player, they maybe the market leader or significant follower. One or
other party has invested significantly in terms of switching costs, i.e. tooling, joint training, information
technologyFCAD/CAM, etc.
Technological One or other party has a distinctive process capability or product capability that the other requires. Therefore the partner is
seen as significantly adding to the others business. In addition, there could be the possibility of joint product development
by linking together technologies and approaches to produce a new product or processFsynergistic technological
competitive advantage
Political One or other party has to deal with the other due to either external environmental or internal organisational pressures. For
example in aerospace and defence firms are often obliged to deal with home manufacturers. (In one of the case study
examples 80% of supply is from the home market.) The USA has ‘Buy American’ laws, small and disadvantaged business
legislation, etc.
a
Developed with grateful help from Max Warburton, M.Phil. Student, School of Management, University of Bath.

Table 3 In order to construct the model, the definitions of


Trust versus risk Sako were used as they provide a convenient positive
Trust Risk and negative spectrum to classify risk or certainty types.
Knowing they will do what they Fear of the unknown
In addition to the Sako definitions, the added dimension
said that they would of political certainty was also added. It was clear from
Having faith Unpredictable the literature that this was an area of concern for most
A willingness to participate Chance of failure firms and it had a direct effect on the level of risk that
An understanding Take advantage the customer or supplier was prepared to take. This
Being predictable Unprotected
category was concerned with a range of issues, namely
the management of internal political concerns such as
adhering to organisational local sourcing policies, as
‘risk’, i.e. how certain versus uncertain is the same as the well as wider external political issues, i.e. customer
probability of success or failure of a given event. The specified sources.
relationship literature (see Table 1) refers constantly to It is important to note that this model and these criteria
the issue of ‘trust’ within relationships. However, the are equally applied to the customer and supplier, and that
term is never clearly defined and certainly not oper- they focus on a specific product or service, not the
ationalised. Sako (1993) has developed the closest organisation in general. Table 4 outlines the key dimen-
workable definition of trust by defining it (using an sions of certainty and gives a brief description of each.
arms-length and obligational contracting continuum) The purpose of this model is to allow relationship
into three distinct categories. These categories are very strategies to be positioned across a range of dimensions
useful and will be built upon to form the next dimension from both a customer and supplier perspective. When a
of this model. When examining the literature and also firm realises the type of relationship that they currently
the comments made by practitioners on relationships have, they can then make the decision to either change
there is a clear distinction between what they view as or maintain it. The model allows firms to alter the
trust and what they view as risk. Ironically they appear relationship based upon the two key dimensions
to be the same thing, just different ends of the spectrum, indicated, i.e. if high levels of one-sided dependency
with trust tending to be ‘positive’ and risk tending to be exist it may be in one or other of the parties interests to
‘negative’. Table 3 illustrates this point. alter this by manipulating the dependency situation, for
These views have been backed up on numerous example, by instigating a risk and reward sharing
occasions with discussions with a variety of students agreement. The key point is that it focuses the firms to
and managers. It is clear that trust is seen as predictable consider the relationship that they have and the
and safe and risk is seen as unpredictable and therefore relationship that they require, based on a business case
not safe. Further to this argument is how risk averse or scenario. Having identified the current relationship the
risk taking the firm is. This will naturally be based on firm(s) can then make a strategic decision to either alter
the level of reward perceived from the transaction.16 it or leave it where it is.
It is clear from the literature and case examples that
16
A concept discussed in the literature on risk and referred to as firms will consider the relationship aspect as important
utility curves. but often unconnected to the output of what they may
80 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82

Table 4
A typology of inter-organisational certainties

Certainty Definitions of certainty

Contractual How certain are the parties that one or other will perform to the specifications of the contract?
Competence How certain are the parties that one or other has the capabilities to perform to the contract? e.g. the required levels of skills and
competencies, technological capability, etc.
Goodwill How certain are the parties that one or other will be willing/or not, to go beyond their contractual duties and help the other
should they need it
Political How certain are the parties that the other is able to fulfil any internal or external political issues? e.g. protection of data,
intellectual property, etc.

expect. This model forces firms to connect the deliver- could try to become independent and move towards box
able output to relationship type that will deliver. B. The research highlighted two examples of this. The
Further, it is also possible to overlay on the matrix a first was in the aerospace industry where an OEM
range of skills and performance measures that would sit purchased large amounts of aluminium from one source.
in each quadrant. This will allow the firm to see if the The OEM wished to develop the relationship but the
desired strategy is obtainable to them. supplier refused. The OEM was dependent on the
When using this approach firms are asked to indicate supplier but the supplier was not dependent on the
which types of dependency and certainty they feel are OEM: a one-sided dependency. In addition, the OEM
more and less important. This is an important approach was unable to give long-term commitment to the
as it facilitates a discussion on the relative merits and supplier due to order book constraints and also to a
issues that the various team members consider when general lack of enthusiasm to realise this information. In
looking at the relationship. One of the case study order to resolve the situation the OEM decided to do
companies used this approach on a major procurement two things, to explore with the supplier a joint initiative
project. The customer was under the impression that using their technologies to develop ‘new’ composite
they were not dependent on the supplier and the supplier materials (thus increasing the dependency) and also a
was dependent upon them. After running the analysis it wider view of future orders and planning cycles
appeared that this was not the case, in fact the situation (increasing certainty). This approach moved the rela-
was the reverse. This revelation immediately evoked a tionship from box A towards box D. A second case in
change in the behaviour of the customer firmFthey the nuclear industry had a similar problem and was tied
began to explore ways of creating a mutual dependency to a major supplier. They attempted to try and work
situation. with the supplier but to no avail, primarily because the
The major driving principle of game theory is that a customer could not offer a differentiated approach. The
‘tit for tat’ approach is the most successful game that customer decided to resource and after several years has
any two firms can play; in addition, the principle that now managed to do so, he has moved into box B and is
firms are foremost maximisers and secondly satisfiers currently attempting to regain some of his losses
(Cyert and March, 1963) explains why firms will always through tight contractual agreements.
resort to opportunistic behaviour when they are able Boxes C and D represent two distinct modes of
too, what stops them will be the fear of ‘tit for tat’. If the collaboration. Tactical collaboration refers to working
supplier and customer understand this approach then with several suppliers and focusing mainly on the
the range of options open to the firms to collaborate are certainty element of the relationship and focusing on
limitless, as the relationship will be based on a process improvements, such as inventory policy, im-
competitive action within a collaborative framework. provements in quality and so on. The ‘Strategic
The model shows that when either firm is in a Collaboration’ box refers to very close collaborations
situation of high uncertainty (high levels of risk), that are generally focused on long-term product rede-
depending on the dependency situation either a tradi- sign, joint technology developments and joint business
tional relationship will prevail or, if either party is ventures. The key issues here is maintaining the mutual
dependent on the other an opportunistic strategy will be dependency, this is usually sustained by focusing on a
followed. In box A, the dependency is one-sided and technological dependency.
high and the levels of certainty are low, i.e. uncertain.
Therefore, the firm in a weaker position must either look
for ways to increase levels of certainty and mutual 8. Conclusions
dependency through a differentiation strategy, risk and
reward schemes, etc. This would allow the relationship This paper has presented an alternative approach to
to move from box A to either C or D. Alternatively, they viewing relationship strategy, it has explored the past
P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82 81

and current literature and has suggested that in order to Cavinato, J.L., 1991. Integrating purchasing into corporate strategy.
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This paper has suggested that in order to conceptua-
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Cousins, P.D., 1998. An investigation into supply base restructuring.
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Bath, School of Management.
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