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Supplier Relationship Map

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DOI: 10.1080/13675569908901571

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Supplier Relationship Map
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International Journal of Logistics: Research and Applications, Vol. 2, No. 1,1999 39

Supplier Relationship Map'

CHRISTOPHER S. TANG
Anderson Graduate School of Management, UCLA, Los Angeles, CA, U S A

ABSTRACT Despite recognizing the strategic importance of their relationship with

suppliers, most manufacturers maintained art arm's length relationship with their
suppliers until the late 80s. This paper examines the underlying reasons for the drarnatic
changes in the supplier relationship during the late 80s and early 90s. In addition, we
present a conceptual franwwork for lnapping diflerent types of supplier relationships for
different business environments. This paper concludes with a discussion of some
strategies for the buyers and the suppliers that will change the supplier relationship.

New Changes in Supplier Relationship

Virtually every company relies on their suppliers to provide parts, final
products, or services. In the traditional sense, the buyer is the manufacturer
while the supplier is a vendor that provides parts or services to the buyer. In
this paper, we shall include the case where the buyer is a service provider
(retailer) while the supplier is a manufacturer (Proctor & Gamble) or a freight
service company (Federal Express). In general, suppliers play an important
role in determining the competitiveness of the buyers because the cost of
materials purchased by most manufacturing companies exceeds 50% of total
sales, and the amount of goods purchased by most retailers is even higher
(c.f., Raia (1990)).
Even though suppliers are critical for buyers' success, suppliers have
historically been viewed merely as the entities that represent costs to the
buyer. in order to keep the purchasing cost low, buyers often pressured their
suppliers to lower their prices and threatened to switch to new suppliers if
they did not comply with their requests. Consequently, the trust between the
buyer and supplier has been weak and the relationship has been adversarial
(c.f., Bravmen (1993)). Management experts reinforced this behavior. For
example, Porter (1980) suggests that in order to maintain bargaining power,
the buver should source from manv , s u&~L ~ l i e rcommit
s: short term contracts ~ ~-

with the suppliers; share no information with suppliers regarding sales, cost,
product design; and make (or receive) no improvement suggestions to (or
from) suppliers.

Correspondence:Christopher S. Tang, 110 Westwood Plaza, Anderson School of Management,

University of California, Los Angeles, CA 90095, USA. E-mail: chris.tang@anderson.ucla.edu

1367-5567/99/010039-18 O 1999 Taylor & Francis Ltd

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According to a study conducted by Helper (1991), some of the above

strategies were common practice within the US. in the early 1980's. How-
ever, the supplier relationship changed dramatically from adversarial to
cooperative in the US. during the late 1980's. Prior to this time, many U.S.
manufacturers did not realize that they were not competitive in cost, quality,
delivery, and new product development until the early ~ O SIn. ~the late 80s,
the strategic value of suppliers was realized, and U.S. manufacturers finally
develop ways to utilize their suppliers for cost reduction, quality and
delivery improvements, and new product development cycle time re-
duction3 Here are some examples:

Consolidation of Supplier Base

When dealing with multiple suppliers, it is often costly to coordinate the
procurement process and to monitor the quality consistency of different
supplier^.^ Ellram (1991) and Hines (1996) develop two different models of
supplier relationship that call for supply base consolidation. Throughout the
late 80's and early 90's, many U.S. manufacturers reduced the number of
direct suppliers. Specifically, Xerox reduced the number of suppliers from
5000 to 400 and AT&T reduced its number of suppliers from 300 to 75 (c.f.,
Burt (1989), Wall Street Journal (19911, and Razzouk (1996)). Some companies
even push for sole sourcing. According to Deming (19861, sole sourcing
minimizes the total costs of dealing with suppliers, including overhead cost
of managing multiple suppliers, purchase price, and the cost of quality
control. In addition to Deming, the Department of Trade and Industry in the
UK promotes the idea of sole-sourcing as well (c.f., DTI (1991)).

Long Term Contracts

During the 80's and early 90's, many U.S. companies increased the length of
supplier contracts. According to Helper (1991), the average length of con-
tracts in the U.S. has increased from 1.2 years in 1983 to 2.3 years in 1989.
According to Dyer (1996), Chrysler used to force their suppliers to bid for
new contracts every 2 years in the early 80's, but the company now signs
supply contracts for the life cycle of a model. In a study conducted by Hines
(19951, the seat for the Mazda 626 is single sourced for the product life cycle
of typically three to five years.

Supplier Shares lnforntation with Buyers

Instead of focusing on cost, buyers began to evaluate their suppliers on many
dimensions. For example, Carroll (1996) reported that AT&T now evaluates
their suppliers based on quality, delivery, production process, R&D capa-
bility, service, and price. To compete for supply contracts, it is quite common
for suppliers to provide information to their buyers regarding production
process, internal cost, and quality control process. In the U.S., the percentage
of suppliers that provided this type of information to the buyer has increased
from 40% in 1984 to 80% in 1993 (c.f., Helper (1991) and Helper and Sako
(1995)).
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Supplier Relationship Map 41

Buyer Shares information with Suppliers

When a long term relationship has been established with a few key suppliers,
the buyer can benefit from sharing information with those suppliers. First,
some buyers now share information with the suppliers during the design
phase of the product as a way to reduce total product cost and product
development time.' In a recent study, Dyer (1996) describes how this process
has helped Chrysler to reduce the product development cost by approxi-
mately $75 million in 1994, reduce the product development cycle from 234
weeks to 183 weeks, and increase market share and profitability. According
to a different study conducted by MacDuffie and Helper (1997), Honda
America developed the BP (best process, best practice, and best performance)
program that is designed to help Honda's suppliers to improve their
efficiency. Those suppliers who participated in the BP program observed
25% improvement on productivity and 66% improvement on quality. Besides
sharing information during the design phase with the suppliers, some buyers
now share sales and inventory information with the supplier^.^ Perhaps the
most often cited example of this is WalMart (the buyer), which provides store
sales information via Electronic Data Interchange (EDI) to Procter & Gamble
(the supplier). After receiving the sales information, P&G is responsible for
monitoring and replenishing WalMart's inventory. This practice has helped
WalMart to reduce inventory and increase customer service (c.f., Kumar
(19961, and Buzzell and Ortmeyer (1995)). The supermarket industry now
utilizes a similar strategy with their suppliers. Clark and McKenney (1994)
and Clark and Hammond (1996) describe how various supermarkets (the
buyer) share sales and inventory information with Campbell's Soup (the
supplier) so that Campbell's can monitor and replenish the inventory at
the supermarkets and make frequent Just-In-Time deliveries in small lots.
In both studies, they concluded that supermarkets can reduce inventory
due to small lot deliveries and increase sales due to increased product
availability.

Buyer and Supplier Exchange Improvement Ideas

The trust level between buyer and supplier is often higher when a long-term
contract is established. As a result, there is incentive for the buyer and the
supplier to exchange improvement ideas? First, the supplier can provide
improvement ideas to the buyer that can help lower the system-wide cost.
For instance, Chrysler launched a program called SCORE (supplier cost
reduction effort) in 1993 that encouraged suppliers to provide ideas for
reducing system-wide costs without hurting suppliers' profit. This program
has helped Chrysler to obtain the highest profit among the big three in 1993
and 1994, and continue to enable Chrysler to be the low cost leader among
the big three in 1997 and 1998 (Wall Street Journal, 1998). Chrysler saved $76
million after implemented 129 valuable suggestions from Magna, an engine
and transmission systems supplier (c.f., Dyer (1996)). Second, the buyer can
offer improvement ideas to the supplier. For instance, Treece (1992) reported
a success story in which Toyota taught Johnson Controls Inc., a seat supplier,
how to improve their operations and implement a Just-In-Time system. As a
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42 C. S. Tang

result, Johnson Controls was able to reduce inventory by 50%, and Toyota
received a price reduction.
The changing supplier relationships in the late 1980's and early 1990's
raise certain interesting questions: Why doesn't every buyer establish sup-
plier relationships similar to those described above?' How should a buyer
determine the right supplier relationship? In this paper, we shall present a
framework that helps managers answer these questions.
Despite a vast management literature on supplier relationships, very few
frameworks for prescribing supplier relationship have been established9. We
shall provide a brief review of several existing models. Kraljic (1983) re-
ported an approach to formulating supply strategies that captures the profit
impact and the supply risk of different sourcing strategies. In addition to
Kraljic's work, there are various insightful models for describing and for
managing Japanese-style supplier relationship. First, Ellram (1991) describes
Japanese-style supplier relationship as a partnership that involves a commit-
ment over an extended period of time, and includes sharing of information
along with sharing risks and rewards. The benefits of this type of partnership
lie within management, technology, and financial. Next, applying the lessons
learned from a study of the automotive industry in the UK (c.f., Lamming
(1986)), Lamming (1993) develops the "lean supply model" that captures the
present position of the leading manufacturing and assembly companies in
the automotive industry. Another model for describing the Japanese-style
supplier relationship is the "network sourcing model" developed by Hines
(1995). The network sourcing model is based on the premise that end-prod-
uct producers are competing on the basis of the competencies and skills of
the supply networks that add value to the final product. To build a successful
supply network, Hines suggested that inter-company integration of various
internal processes (such as costing systems, human resource policies) and
various coordination mechanisms (such as information sharing, risk and
reward sharing, supplier involvement, etc.) are critical. Within the manage-
ment literature, the literature related to supplier relationships can be divided
into four major groups. The first group describes different types of supplier
relationships (c.f., Helper (1987), Kumar (19961, and Lamming (1986)). The
second group of is focused on the comparison of supplier relationships in
U.S. and in Japan (c.f., McMillan (1990), Helper (19911, Helper and Sako
(1995), and Hines (1995)). The third group explains why and how Japanese
supplier relationships can be more successful (c.f., Dyer and Ouchi (1993)
and Dyer (1996), Hines (1996)). The fourth group reports success stories of
supplier partnership in the UK and in the US (c.f., Beecham and Cordey-
Hayes (1998), Carr and Truesdale (19921, Ellram and Edis (19961, McDuffie
and Helper (1997), Sako (1993), and Vokurka (1998)).
This paper presents a process and unified framework for selecting
supplier relationships as well as the operating characteristics of the different
types of supplier relationships. We develop a process that is intended to help
a buyer to select an appropriate supplier relationship. As such, the discussion
will focus on the buyer's perspective. The paper is organized as follows. In
the next section, we present two determining factors that play an important
role in selecting an appropriate supplier relationship. Section 3 presents
different types of supplier relationships and their operating characteristics. In
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Supplier Relationship Map 43

section 4, we show how those determining factors can be used to select an
appropriate supplier relationship. Section 5 discusses some of the challenges
for firms in implementing changes to their supplier relationships.

Two Determining Factors for Selecting Supplier Relationship

When a buyer purchases a part, product, or service from a supplier, there are
many determining factors for selecting an appropriate supplier relationship.
(To avoid repetition, we shall use the term part, product and service inter-
changeably.) Two key factors that play an important role in determining
supplier relationship are: strategic importance of the part to the buyer and buyer's
bargaining power. These two factors are critical for the case when the market
risk is relatively lowlO. However, when the market risk is high, the buyer
needs to examine additional factors when selecting an appropriate supplier
relationship: supplier's technological capabilities, supplier's willingness to
share or give access to technology, supplier's willingness to participate joint
research and development project, and supplier's willingness to share
financial risks. To simplify the exposition of our framework, we shall focus
on the case in which the buyer needs to consider only those two key factors.
However, our framework can be easily extended to include additional
factors.
First, the strategic importance of the part to the buyer is an "aggregate
measure" of the extent to which the part would help the buyer to meet the
"qualifying criterion" and the "order-winning criterion." " Specifically, the
qualifying criteria are the conditions (eg. product safety) that the buyer has
to meet in order to enter or stay in the market place, while the order-winning
criteria are the requirements (e.g., selling price) that the buyer has to meet in
order to compete for higher market share. In general, the specific definitions
of these two sets of criteria depend on the market conditions and these
definitions could change over the course of the product's life cycle. For
example, Hill (1989) commented that price was the qualifying factor and
quality was the order-winning criterion for the Japanese companies to enter
the television market in U.K. during the 70s. However, as the market became
mature, quality has become a qualifying factor and price has become an
order-winning criterion in the 80s.
The strategic importance of the part to the buyer is considered high
when the part plays a significant role in helping the buyer to meets the
qualifying criteria or the order-winning criteria. Table 1 presents some of the
conditions under which the part does help the buyer to meet one or both of
these criteria.
Next, the buyer's bargaining power is the second determining factor for
selecting supplier relationship. Table 2 highlights some of the conditions
under which the buyer has strong bargaining power1'.

Classification of Supplier Relationships

Helper (1991) classified supplier relationships according to the methods used
to resolve problems between the buyer and supplier. By utilizing the frame-
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TABLE
1. Strategic Importance of the part to the buyer.

Business condition for high strategic importance of the part to the buyer Affected Criterion

The part affects the basic functionality of the product.' Qualifying criteria
The part affects the safely of the buyer's product? Qualifying criteria
The part affects the time to market of the product. Order-winning
criteria
The part affects the key product performance valued by customers Order-winning
(such as product performance, delivery, reliability, price, etc.)? criteria
The part enables the buyer to differentiate its products for Order-winning
capturing market share or for dominating the market.' criteria

'For example, the microprocessor is a critical component for a computer to perform various
calculations? For example, the air-bag of a car is a critical part that helps a car manufacturer to
enter or stay in the market place? For example, the anti-lock brake is an important component for
improving the overall performance of a car.' For example, the navigation system within a car is
a part that makes the car more unique.

TABI.II
2. Buyer's Bargaining Power.

Business Condition for buyer to achieve higher bargaining power

The buyer has in-house capability to produce the parts.

The buyer has complete information or the knowledge of the production process of the part.
The buyer would incur low supplier switching cost
The buyer is an important customer to the supplier (in terms of volume, long term prospect, and
price).
The buyer has strong reputation in the market (in terms of market position, reliability in payment,
supplier development programs).
There are multiple suppliers available in the market.

work developed by Hirschman (19701, Helper classified the supplier relation-

ships into two types: exit and voice. In an "exit" relationship, the buyer will
switch supplier when there is a problem with the supplier. In a "voice"
relationship, the buyer works with the original supplier to resolve the
problem. While Helper's classification captures the commitment and com-
munication level between the buyer and the supplier, it does not capture
the operational issues as well as the pricing issues under different types
of supplier relationships. In this paper, we classify the supplier relation-
ships into four types: Vendor, Preferred Supplier, Exclusive Supplier, and
Partner.

Vendor
A vendor tends to be a supplier who makes common parts and competes
solely on unit price. Since there are numerous suppliers in the market, the
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Supplier Relationship Map 45

contract term tends to be short and the buyer will switch supplier when there
is cheaper source of supp1y.l3The communication level between the supplier
and the buyer is low and the interaction usually occurs when the buyer
places a purchase order.

Preferred Supplier
A preferred supplier tends to provide more complex/unique products or
services. Since some special capability is required for developing more
complex/unique products, there are fewer suppliers available in the market.
Hence, the switching cost for the buyer would be high and the contract term
tends to be longer. To make sure that the supplier would develop the
products according to specification, the buyer would ask the supplier to
provide information regarding production process, quality control, cost, etc.
To ensure product availability and to protect his bargaining power, the buyer
usually works with few preferred suppliers instead of sole source, and
creates incentives for the supplier to reduce cost or improve quality. In this
case, the buyer would normally reward the best-performing supplier with
more business or bonus for cost reduction, quality improvement, on-time
delivery, etc.

Exclusive Supplier
An exclusive supplier tends to provide unique product or service that very
few other suppliers can provide. In this case, the switching cost would be
high for the buyer, and hence, the contract term is usually even longer than
that of a preferred supplier. Since the supplier has special capability to
develop unique products that are critical to the buyer's business as well as
the supplier's business, the supplier would request information regarding
design, cost, and sales from the buyer. In many instances, the supplier would
sell or market the unique product or services through the buyer to the end
customers. Hence, it is quite common for an exclusive supplier to demand
the buyer to sole source the products from the supplier'" and jointly market
the product.15

Partner
A partner is a supplier who provides unique products and services, and
commits revenue and risk sharing with the buyer. The contract term is
usually long and is usually incomplete or informal. An incomplete or
informal contract allows the buyer and the supplier to exchange improve-
ment ideas freely, and to solve unforeseen problems as a team instead of
following the terms specified in the contract. This kind of informal contract
normally requires the commitment from top management.16One key differ-
ence between Partner and Exclusive Supplier is that both buyer and supplier
form a strategic alliance that is intended to benefit both parties in a long run.
Table 3 summarizes the operational characteristics of different types of
supplier relationships as described above.
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TABLE
3. Operational Characteristics of Different Types of Supplier Relationships.

Type of Supplier
Relationship Vendor Preferred Supplier Exclusive Supplier Partner

Types of Contract Purchase Contract Contract Agreements

Orders
Length of Contract Short Medium-Product life Medium-Product life Long
of a model of a model
Product/Service Standard Specialized Specialized Leading Edge
Type
Information Sporadic Frequent (supplier Frequent (buyer provides Continuous
Exchange provides information information regarding (both buyer
regarding cost, process, design, sales, cost, and supplier
quality to the buyer) inventory to the supplier) exchange
information)
Pricing Scheme Unit Price Unit price plus Unit price plus incentive Risk and Profit
incentive for supplier for buyer to sell better Sharing
to deliver better final products/services
products/services
Delivery Schedule Infrequent Frequent Frequent Very Frequent
Senior Management Not Necessary Necessary Critical
Involvement Necessary
Supplier No Yes Yes
Development
Programs offered by
the Buyer'
Number of suppliers Many Few One or Very Few One or Very Few

'Hines (1995) provides an insightful description of the supplier development program at Mazda known as Kyoryoku Kai
(Supplier Association). This Supplier Association is a mechanism that enables Mazda to communicate with their first-tier
suppliers about improvement ideas. MacDuffie and Helper (1997) report a program of similar nature (the BP program) that
has been implemented successfully at Honda America.
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Supplier Relationship Map 47

Strategic Importance
of Part to the buyer

Buyer's Bargaining
Power
L H
FIGURE
1. The Supplier Relationship Map.

The Supplier Relationship Map

We now examine the conditions under which these supplier relationships are
more appropriate. In general, the selection of a supplier relationship depends
on the business environment as outlined in Section 2. Specifically, the
business environment is defined by the strategic importance of the part to the
buyer and the buyer's bargaining power. To link these factors with supplier
relationships, we first construct a two-dimensional map (the strategic import-
ance of the part to the buyer as the vertical axis and the buyer's bargaining
power as the horizontal axis) that depicts different business environments.
We then map supplier relationships for different business environments.
This conceptual framework for mapping supplier relationships is depicted in
Figure 1.
In the model presented above, the buyer dominates the supplier when
the strategic importance of the part to the buyer is low and when the buyer's
bargaining position is high. In this case, the buyer can pressure the supplier
to reduce cost and improve quality, which usually results in a Vendor type
relationship. Similarly, the supplier dominates the buyer when the strategic
importance of the part is high and when the buyer's bargaining position is
low. In this case, the supplier could be in the position to help the buyer to
become more competitive in term of cost, quality, delivery, or new product
introduction. These conditions normally lead to a Partner type relationship.
When the strategic importance of the part is high and yet the buyer's
bargaining power is high, it is beneficial for the buyer to establish a Preferred
Supplier relationship with the supplier. Likewise, when the strategic import-
ance of the part is low and the buyer's bargaining power is low, it is
appropriate for the buyer to engage in an Exclusive Supplier relationship
with the supplier.
There are numerous real world examples that support this framework.
In the remainder of this section, we shall detail examples of both successful
and failed relationships.
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48 C. S. Tang

Successful Supplier Relationships

Clain~1: Vendor relationship is appropriate when the strategic importance of the part
is low and Lhe buyer's bargaitring power is high
Exalnple: The relationship between Hewlett Packard's DeskJet Division
and its power supply manufacturer exemplifies a successfully mapped and
operated Vendor relationship. In this case, the strategic importance of the
power supply unit is relatively low (in comparison to the formatter or the
printer cartridge) because it is not a critical component for H P to compete in
the printer market. At the same time, HP's bargaining position is high
because there are many suppliers in the market. This relationship clearly falls
within the Vendor quadrant in the lower right hand corner of Figure 1.Based
on our first hand experience, we have observed that H P has formed a vendor
relationship with power supply makers, requiring a low level of commitment
from H P and providing low supplier switching costs.

Clairn 2: Preferred Supplier relationship is appropriate when the strategic import-

ance of the part is high and the buyer's bargaining power is high
Exaniple: In the case of Chrysler and a brake supplier, a successful
Preferred Supplier relationship is demonstrated. The brake is a strategically
important component that affects the safety, performance, cost, and quality
of a car. At the same time, Clwysler's bargaining position is high because
there are many other brake suppliers and Chrysler is a n important customer
to the brake supplier. As reported in Dyer (1996), Chrysler forms a Preferred
Supplier relationship with a few brake suppliers. Chrysler requests infor-
mation from the suppliers and rewards the best-performing supplier for cost
reduction, quality improvement, or reliable deliveries.

CIai~n3: Exclusive Supplier relationship is appropriate when the strategic iniport-

ance of the part is low and the buyer's bargaining power is low
Exnniple: A case where a supplier relationship is successfully operating
in the Exclusive Supplier quadrant is WalMart and Proctor and Gamble
(P&G). The strategic importance of personal care products produced by P&G
is relative low, because WalMart sells a wide range of products besides
personal care products and because the revenue generated from personal
care products is relativey low for WalMart. At the same time, WalMart's
bargaining power is low because P&G offers a wide range of personal care
products that most shoppers demand and P&G is the market leader for many
of these products. As reported in Kumar (1996), P&G is a n exclusive supplier
in the personal care product category. Along with this exclusive agreement,
WalMart shares sales and inventory information with P&G, and P&G replen-
ishes the shelf-inventory for WalMart.

Claitn 4: Partner relationship is appropriate when the strategic importance of the

part is high and the buyer's bargaining power is low
Exaniple: An example of a successful Partnership between supplier and
buyer is that of Case Corporation and Fritz Companies Inc. Case is a $5
billion construction equipment company and Fritz is one of the leading third
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Supplier Relationship Map 49

party logistics providers in the world. As the market becomes more compet-
itive and as the product life cycles become shorter, Just-In-Time delivery is
of strategic importance to Case's business success because it affects customer
service and inventory cost. At the same time, Case's bargaining power is low
because Case is a relatively small customer to Fritz and because Fritz has the
leading information technology for supporting logistics and distribution that
Case needs desperately. As reported by Minahan (1996), Case has formed a
Partner relationship with Fritz. This partnership will allow Fritz to manage
Case's logistics operations, comprised of more than 800,000 shipments of
parts, components and equipment annually to 4100 independent dealers in
150 countries. To streamline the shipping operation, Fritz will act as leader
integrator who manages the warehousing operations performed by a third-
party GATX Logistics and the shipping operations performed by Schneider
Logistics. As a result of the this partnership between Case and Fritz, Witt
(1996) reported that Case has reduced inventory by $30 million, reduced
cycle time from one month to 48 hours, and increase on-time delivery from
85% to 99%.

Failed Supplier Relationships

Because firms rarely advertise their failures, it is difficult to find evidence of
failed supplier relationships. Nevertheless, examples of failed supplier rela-
tionships lend support to the framework depicted in Figure 1. In preparation,
the example of Cluysler and its brake supplier suggests that the relationship
between a car manufacturer and its brake suppliers should be clearly be in
the "Preferred Supplier" quadrant. Below, we shall use Toyota and GM as
two recent examples that demonstrate the challenges when the buyer oper-
ates under a relationship that is different from the Preferred Supplier rela-
tionship.

Sole-sourcing at Toyota
In 1978 Toyota learned not to rely on a single supplier when a major
expressway was closed, blocking off a single-source supplier. However, in
the case of Aishin Seiki (a brake supplier), Toyota did not follow its own
guidelines requiring at least two suppliers for every part. Although the
relationship should be based on Preferred Supplier relationship that pro-
motes friendly competition among suppliers, Aishin Seiki was partially
owned by the Toyota family and thus received treatment more like a
partnership (and 90% of Toyota's brake proportioning valve supply busi-
ness). The fact that this relationship was incorrectly mapped became an issue
when a fire erupted at Aishin Seiki in February of 1997. Toyota production
was shut down for an entire week, resulting in 70,000 lost units of production
and a cost of $195M. Due to Toyota's reliance on just-in-time inventory
systems, Toyota had virtually no spare parts on hand to enable continued
production. The only option was to stop producing cars until the parts could
be procured elsewhere. The impact on the company's supplier practices is
uncertain. In one instance, Toyota management vowed to "double-source"
parts to avoid learning the lesson for a third time (c.f., Treece (1997)).17
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50 C. S. Tang

However, a Wall Street Journal article argued that due to the rapid regroup-
ing of Toyota's suppliers in getting the part production back within a week,
their current system was proven to be "efficient" (c.f., Wall Street Journal
(1997)). Even though Toyota did not operate under a Preferred Supplier
relationship, Toyota continues to operate efficiently through superior sup-
plier relationships, contingency plans, and a culture that is more capable to
deal with crisis.

Sole-sourcing at General Motors

While the GM example is similar in background to the Toyota example, the
outcome is radically different. In early 1996, GM Delphi Chassis supplied
90% of General Motor's brakes. Delphi is a wholly-owned subsidiary of GM,
making it a Partnership in our model. Realizing that it is more appropriate
to establish a Preferred Supplier relationship instead of Partnership, GM had
planned to source anti-lock brake components from Bosch. In response to
this news, the United Auto Workers decided to strike at the two Delphi
plants that produce the brakes for all GM cars, in addition to Chrysler and
Isuzu (c.f., Judis (1996)). Three thousand Delphi workers were on strike for
18 days. Approximately 177,000 GM workers were laid off from 26 of its 29
plants. It was estimated that GM lost production of 200,000 vehicles and lost
$900 M in profit for the period. In addition, many peripheral businesses were
forced to lay off workers during this period as the shutdown rippled through
the industry. Unlike Toyota, GM was less capable of managing this Partner-
ship relationship efficiently when it was Preferred Supplier relationship (c.f.,
McKesson (1996)).

Challenges in Managing Supplier Relationships

Although our framework (Figure 1)can be used for mapping different types
of supplier relationships for different business environments, there are two
key challenges in managing supplier relationships. First, there are instances
in which the buyer or supplier can change the business environments and
modify the subsequent supplier relationship." Second, even if the supplier
relationship has been stabilized, there are issues that need to be resolved in
order to operate the relationship efficiently.

Dynamic Supplier Relationship

Since the business environment is constantly changing, there are instances in
which the supplier relationship is dynamic. We offer two examples.

The buyer can increase its bargaining power by finding substitute p r o d ~ c t s . ' ~
Consider Intercon Japan's connector manufacturer as the buyer and
Asahi Metal's phosphorus bronze manufacturing as the supplier. According
to Mishina and Flaherty (19881, the strategic value of phosphorus bronze is
high to Intercon Japan (the buyer) because it affects the performance of
Intercon Japan's connectors. At the same time, Intercon's bargaining power
with Asahi Metal (the supplier) is low because Asahi is the only supplier that
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Supplier Relationship Map 51

can fabricate phosphorus bronze for connector applications. Instead of form-

ing the Partner type relationship with Asahi Metal, Intercon Japan developed
a strategy for increasing its bargaining power. Specifically, Intercon Japan
persuaded Nagoya Steel (a potential supplier) to develop a low cost substi-
tute. By having a product substitute, Intercon Japan was able to avoid the
upper left corner business environment and operate in the upper right corner
of Figure 1. Eventually, both Asahi Metal and Nagoya Steel became the
preferred suppliers for Intercon Japan.

The supplier can lower the buyer's bargaining power by providing value added
a~tivities.~~
The transportation and distribution services provided by most freight
service providers such as DHL, Federal Express, UPS (as suppliers) are
considered commodity type services and they usually compete solely on
price. Because there are many of these service providers available in the
market, the buyer's bargaining power is relatively high. In order to lower
the buyer's bargaining power, some logistics service providers are now
providing special value added services to their customers so as to secure
their contracts. For examvle. Razzouk (1996) described how Federal Exvress
provides value-added se;vice to AT&T'~celiular phone division. ~ ~ e c i f i i a l l ~ ,
Federal Exvress stocks certain AT&T phones at their warehouse, delivers a
new cellular phone to the customer who reported a broken AT&T phone by
10:30am the next morning, and prepares the paperwork that facilitates the
return of the broken phone. Consequently, by providing unique value added
service to the buyer, Federal Express was able to become an exclusive
supplier for AT&T instead of being a ~ e n d o r . ~ '

lrnplementing a Supplier Relationship

Besides changing the business environments and the dynamic supplier
relationship, there are two key issues that need to resolve in order to make
the supplier relationship work.

Risk and benefit sharing.

There are occasions in which both the buyer and the supplier have to
invest in process technology or information technology so as to improve the
system-wide performance. In this case, it is unclear how the cost should be
shared. In addition, there are cases in which the system-wide cost is reduced
after the buyer and supplier form a Partner type relationship. However, there
is no formal mechanism for splitting gain.

Trust.
When the buyer and the supplier exchange information regarding de-
sign, process, sales, etc., it is critical to maintain the confidentiality especially
when the buyer and supplier compete with each other. For example, Canon
is an exclusive supplier of LaserJet engines for HP's LaserJet printer division,
and Canon and HP exchange information regarding product design and
sales. However, at the same time, Canon also competes with HP in the
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52 C. S. Tang

LaserJet market. Therefore, it is critical for both parties to establish the trust
that is required to guarantee the confidentiality of certain information. The
reader is referred to Fukuyama (1995) for an insightful discussion on the
issue of trust.
In summary, we have presented a framework for mapping supplier
relationship under different business environments. In addition, we have
provided barious examples, highlighting that selecting the right supplier
relationship can help a buyer to establish its competitive edge, and that
operating the right supplier relationship is certainly critical for obtaining
tangible benefits such as cost reduction, quality and delivery improvement,
etc. While this framework provides a conceptual process for determining
supplier relationship, there are situations in which the buyer can develop
cost based models to evaluate the cost associated with different types of
supplier relationship. For example, the work of Williamson (1981) offered
insights into ways to develop transaction cost models for determining the
optimal number of suppliers. Along this line of development, Ramasesh et al.
(1991) present a mathematical model that intends to compare the cost
associated with sole sourcing versus dual sourcing. While it is conceivable
that this type of cost based models can be further developed to analyze
different types of spplier relationships and to determine the optimal number
of suppliers, the requisite cost information for analyzing this type of model
remains to be a major challenge in practice. This presents an opportunity for
the researchers in managerial accounting to participate in the study of
supplier management.

NOTES
Ill This research is partially supported by UCLA committee on research grant # 92 and
UCLA James Peters research fellowhship. The author would like lo acknowledge the
assistance provided by Mr. Jon Clayton Frech. The author is grateful to Professors Hau
Lee, Steve Lippman, I'eter Hines (the Editor) and two anonymous reviewers for their
constructive comments.
121 This realization occurred after many US. manufacturers benchmarked their operations
against Japanese competitors in early 80s and found that (c.f., Miller and Roth (1988)).
I31 This recognition resulted from the key findings of various Japanese business studies.
Specifically, these studies suggest that Japanese auto makers are more competitive (in
cost, quality, delivery, and new product development) because they maintained superior
relationship with their suppliers (e.g. Womack et al. (1990). More recently, Hines (1996)
commented that superior supplier relationship in Japan enables the Japanese firm to
implement various improvement programs throughout the complete supplier network
successfully. In fact, the Japanese Ministry for International Trade and Industry has
attributed much of Japanese competitiveness to the "strength of its subcontracting
structure" (MITI (1984)).
141 Williamson (1979 and 1981) developed various transaction cost models that capture the
cost of managing multiple suppliers.
151 According to Berliner and Brimson (1988), 80% of the total product cost incurred over the
entire product life cycle is committed during the design phase. As a way lo cut product
cost, Dyer and Ouchi (1993) suggested that early supplier involvement during the design
phase can help the buyer to reduce the design cost and the total product cost. In their
comparative study of U.S. and Japanese auto-makers, they found that early supplier
involvement has contributed 30% cost reduction in cost for a Japanese car.
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Supplier Relationship Map 53

161 Lee ct 01. (1997) showed that sharing sales and inventory information with the supplier
can lead to lower inventory and higher customer service level.
171 According to Helper and Sako (1995), the percentage of suppliers who expect the buyer
to help them to become more competitive has increased from 32% in 1989 to 51% in 1993.
[81 Despite the basic theory that supplier partnership is beneficial, not many companies have
been successful in converting theory into effective practice (c.f., Macbelh (1994)).
191 The economic literature on supplier relationship is voluminous; however, it does not
focus on the issue of mapping supplier relationship for different business environments.
The reader is referred to Williamson (1975) and the comprehensive references provided
in McMillan (1990).
110) Market risk is considered low when the product is evolutionary or when the market
position of the product is clear. The reader is referred to Billington, Lee and Tang (1998)
for details.
[ I l l The qualifying criteria and the order-winning criteria have been used in manufacturing
strategy literature (c.f., Hill (1989)); however, these two sets of criteria can be used as
surrogates for measuring the strategic importance of the part to the buyer.
1121 For additional discussion on the issue of buyer's bargaining power, the reader is referred
to Porter (1980) for details.
1131 For instance, Masten (1984) reported that most US. aerospace companies would manufac-
ture complex and specialized items in-house. When purchasing simple componenls, there
should be more suppliers available and the buyer can switch supplier without incurring
significant cost.
I141 Richardson (1993) conducted an empirical study of three US. industries (automobiles,
heavy construction equipment, and television sets). He observed that the buyers will sole
source when the supplier possesses proprietary technology or when the fixed cost is too
high for dealing with more than one supplier. Also, an exclusive supplier can demand the
buyer to sole source. For example, P&G requests that WalMart not to carry certain
products that compete directly with P&G (c.f., Kumar (1996)).
I151 The "Intel Inside" marketing campaign is the case in point. By displaying the "Intel
Inside" label, Intel (the supplier) can promote its chips via the computer manufacturers
(the buyers) to the customers, and the computer manufacturers can use Intel's brand
name to project the performance of the computers. Microsoft used the same strategy by
introducing the "Designed for Microsoft Windows 95" labels on the computers.
1161 As reported in Thomas (1995), the senior vice president of Land's End Inc. and the vice
president of UPS developed a delivery system in 1994 that would allow Land's End to
deliver any destination in the US within 2 days a t an affordable rate. To achieve this goal,
Land's End and UPS representatives meet regularly to discuss performance issues and
improvement opportunities. For instance, Land's End affixes a label containing a UPS bar
code to every package that enables Land's End lo locate packages. As a result, both
parties observe major benefits and both companies were selected by the American Society
of Transportation and Logistics for the 1995 Carrier/Shipper Partnership of the Year
Award.
[I71 Hines (1995) reported that dual sourcing is a common practice in Japan; however,
sole-sourcing is quite common at the Japanese transplants in the U.S. during the initial
production phase. This is because most US. based suppliers did not meet the Japanese
standard initially.
I181 In addition, when the buyer's or the supplier's organization structure changes (such as
vertical integration, backward integration, merger and acquisition, expansion or downsiz-
ing), the supply relationship will be affected as well. This is another complex issue that
deserves attention; however, it is beyond the scope of this paper.
1191 Besides finding substitute products, the buyer can increase its bargaining power by
acquiring one of the suppliers so as to develop the capability of producing the product
in-house. For example, Compaq announced the plan to acquire Microcom, one the
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54 C. S. Tang
modem suppliers, so as to reduce the bargaining power of other key modem suppliers
such as US Robotics (c.f., Wall Street Journal (1997)).
1201 Besides providing value-added services, the supplier can lower the buyer's bargaining
: power by acquiring other suppliers so as to reduce the supply base. For instance,
Microsoft (as a supplier) attempted to acquire Quicken so as to reduce the number of
financial planning software packages in the market, and American On Line announced its
intention to acquire CompuServe so as to reduce the number of on-line information
services in the market.
1211 We also observed that some consolidated freight service providers (the suppliers) now
offer special services to their garment retailers (the buyer) so as to lower the buyer's
bargaining power. These value added services include sorting different types of garments
for different stores, hanging garments on hangers and racks, bar coding, and tagging,
which enable the retailer get the products to the sales floor quickly.

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