Copyright 2013 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800) 545-7685.

BH 594

Business Horizons (2014) 57, 203—213

Available online at www.sciencedirect.com

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ScienceDirect

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www.elsevier.com/locate/bushor

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Robust supplier relationships: Key lessons from the
economic downturn
Lisa M. Ellram a,*, Daniel Krause b

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a
Farmer School of Business, Miami University, 800 E. High Street, Room 3057, Oxford, OH 45056, U.S.A.
b
College of Business, Colorado State University, 217 Rockwell Hall, Fort Collins, CO 80523, U.S.A.

KEYWORDS Abstract Recent events in the economic and natural environments have tested
Buyer-supplier buyer-supplier relationships like never before. Based on dyadic buyer-supplier case
op
relationships; data from a variety of industries that were deeply affected by the 2008—2009
Alliances; recession, this article explores how long-term relationships responded to an economic
Economic downturn; downturn. Prior to the downturn, these mutually dependent relationships all
Social capital; appeared to be very similar to each other and were characterized by significant
Bounded rationality value-added and social capital stores. However, due to varying degrees of bounded
rationality, the relationships were affected differently and responded differently to
the downturn. Based on the characteristics of the relationship, we develop a
framework of three types of close supplier alliances. This framework can be used
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to assess such relationships and likely responses to adversity to reduce unpleasant

surprises for the alliance partners. This article also provides a set of lessons learned
for managers.
# 2013 Kelley School of Business, Indiana University. Published by Elsevier Inc. All
rights reserved.
No

1. An opportunity to explore quarter of 2009, and the recovery has been slow.
relationships under severe financial Metals (company names changed to protect confi-
dentiality), one of the firms we studied, was
stress
experiencing record growth and profitability entering
2008. It had recently opened its fifth metal stamping
The economic downturn of 2008—2009 was the most
facility and sales were strong. That changed dramat-
severe and longest economic decline the United
ically at the end of 2008 when Metals’ fourth-quarter
States has faced since the Great Depression. The
sales dropped by 45%. The first quarter of 2009 was
Great Recession officially lasted 18 months, cover-
even worse, with a 60% sales drop versus the prior
ing the first quarter of 2008 through the second
year. To stay afloat, the firm reduced its operations
Do

from five to three plants and its headcount from

* Corresponding author
approximately 300 to 120. Still, it fared better than
E-mail addresses: ellramlm@miamioh.edu (L.M. Ellram), companies that went out of business. The popular
dan.krause@business.colostate.edu (D. Krause) press and interviews conducted by researchers

0007-6813/$ — see front matter # 2013 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.bushor.2013.11.004

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 204
indicated that a number of companies laid off large
numbers of people and shuttered their doors tempo-
rarily to minimize variable costs. U.S. annual unem-
ployment more than doubled from pre-recession
levels of 4.6% in 2007 to 9.7% in 2010. Virtually all
industries were negatively affected (‘‘The American
Car Industry,’’ 2009; Chandra, 2010; Khan, 2009;
Raleigh, 2009; Terreri, 2010).
The economic downturn provided a unique op-
portunity to observe key supply chain relationships
under conditions of a virtual stress test and to learn
about their weaknesses, their resilience, and the
value they bring to the respective parties. It created
the opportunity to talk with managers who experi-
enced unexpected–—and sometimes unwelcome–—
changes in their most important supply chain rela-
tionships. It has been widely acknowledged that
yo
good supplier relationships can contribute favorably
and significantly to firm success (Bensaou, 1999;
Chen, Paulraj, & Lado, 2004; Lawson, Cousins,
Handfield, & Petersen, 2009).
2. Research questions and data
gathering
op
This research takes on the challenge of examining
and understanding the effect of significant econom-
ic turbulence on key supply chain relationships.
More specifically, the research question explores:
What is the impact of a significant economic up-
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heaval on buyer-supplier relationships, and are or-
ganizations prepared for the fallout? These
questions were the primary drivers for this
study–—launched in late 2008 and continuing well
into 2010–—as we talked to several large firms and
their most important suppliers. The results indicate
that not all close buyer-supplier relationships are
equal. Likewise, they weather such storms and
No
emerge in different ways. Buyer-supplier alliances
may appear to be solid and balanced, but our re-
search suggests the balance is delicate; a stressful
event like the recent downturn may reveal surpris-
ing relationship vulnerabilities. The results also sug-
gest that some of these relationships may not be as
enduring or partnership-like as previously thought.
2.1. Method: How this research was
conducted
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This research uses targeted, in-depth case studies
from a variety of industries to build an understanding
of the impact of a severe economic downturn on
supply chain relationships. It considers both the
buyers’ and suppliers’ perspectives in exploring
buyer-supplier relationship resiliency during a period
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L.M. Ellram, D. Krause
of severe stress, specifically the economic downturn
t
that began in mid-2008 and ran through early
2010. All of the organizations included were
os
experiencing economic pressures, reduced demand
for their products or services, and a need to adapt
their supply chains in a way that would likely nega-
tively affect their suppliers.
The buyers selected an item of central impor-
tance to their organization’s value-added that had a
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major impact on operations, and where they had
what they considered to be an alliance or partner-
ship with a supplier. The importance of the relation-
ship was independently confirmed with their key
suppliers. These relationship dyads were character-
ized by a high level of interdependence and were
considered long-term relationships. The relation-
ship pairs studied and the items purchased are over-
viewed in Table 1. A more detailed description of the
data analysis is included in the Appendix at the end
of this article.
3. A deep view of strategic buyer-
supplier relationships during a
recession
Both parties to the dyads in this study agreed that
they entered into the recession with very strong,
mutual relationships based on the purchase of an
item that the buying firm viewed as essential to its
end item or service, as summarized in Table 1. These
types of relationships are often referred to as
strategic, evergreen, and long-term alliances, and
contribute significant portions of the value ultimate-
ly provided to end customers. They are built on social
capital, ‘‘the goodwill that is engendered by the
fabric of social relations and can be mobilized to
create action’’ (Adler & Kwon, 2002, p. 17). Social
capital can closely link the organization with suppli-
ers and other external parties to gain knowledge and
skills that would not be available without the expec-
tations of balanced returns in ongoing relationships
(Adler & Kwon, 2002; Petersen, Handfield, Lawson, &
Cousins, 2008). In a business setting, social capital
holds relationships together and strengthens buyer-
supplier relationships as each party works to support
the other and recalls how the other has supported
them, or ‘gone the extra mile’ in times of need. Social
capital is one of the key factors that differentiates
closer, long-term buyer-supplier relationships from
other types of relationships. Like other forms of
capital, social capital requires maintenance and re-
newal or it loses its value (Adler & Kwon, 2002).
At the same time that social capital exists, all
human beings are subject to the phenomenon of
‘bounded rationality’ to varying degrees. Bounded
 Robust supplier relationships: Key lessons from the economic downturn 205

Table 1. Overview of sample firms and relationship context

t
Buyer firms Matched Suppliers Items purchased and relationship context

Wine: Multi-national
company. Business unit
studied is a distributor of a
wide quality range of
wines.
Labels: Large global label printer
and designer. Business unit
studied makes high-quality wine
labels. Labels invested heavily in
equipment, of its own accord, to
support producing Wine’s high-
os
Variety of labels for wine bottles. Prior to the
downturn, emphasis was on expensive labels
with multiple colors and a range of materials.
During and post downturn, emphasis was on
simpler, less expensive labels for mid- to
lower-price wines.

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end labels.

Safety: Manufacturer of a
variety of mechanical and
electronic safety devices
for cars, primarily in
Japan and the U.S.
Plastics: Precision plastic molding
company with about one-third of
its business in automotive
markets; two-thirds in medical
device markets. Safety is Plastics’
only automotive customer.
Plastics is Safety’s primary supplier for its most
technical precision plastic parts. While Plastics’
business volume from Safety dropped 20% during
the downturn, it gained share from Safety as it
took over capacity for another supplier that
went out of business.

Safety: Manufacturer of a
variety of mechanical and
electronic safety devices
for cars, primarily in
Japan and the U.S.
yo
Metals: Precision metal parts
fabrication company with most of
its business in the automotive
sector.
Metals provides Safety with key components for
automotive air bags and seat bags. Metals’
managers described the downturn as ‘‘very
painful,’’ experiencing a 60% volume drop in
1 month.

Oil Tech: Provider of
systems and technologies
to the oil and gas industry.
Provides both oil and gas
equipment and systems.
Steels: Manufacturers of seamless
rolled, machined metal parts to
oil, energy, gears, bearings, and
op
other heavy engineering
industries.
Steels is Oil Tech’s primary supplier for certain
precision metal parts, and experienced a 30%
volume drop. The type and treatment of metals
used in these parts is essential for very large and
expensive pieces of equipment.

Auto: First-tier Shifters: First-tier manufacturer Shifters provides Auto with interior transmission
automotive company, to automotive sector. Provides parts and shifters, and experienced a 40% peak
founded outside of the machined transmission parts and volume drop. Great design that is cost-
U.S. shifters. competitive is primary focus.
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Global Oil: Major global oil Engineered Systems: Supplier of
company. engineered systems and
equipment to the energy sector,
primarily oil and gas, but also
alternative energy.
Both are very large players in the industry whose
relationship spans decades. Mutually dependent
due, at least in part, to size. Experienced a
significant double digit volume drop.

Software: Specialized Services: Integrated information Integrated IT services that are customized to
software provider of technology service provider. Software’s needs. Services is a bigger player, but
No

financial and business values Software and dedicates a large number of

accounting solutions. personnel to Software; sees Software as a growth
company. Experienced a 5% revenue drop.

rationality exists due to our limited ability to pro-
cess information, incomplete information about al-
ternatives, difficulty in assessing risk in a situation,
past experience, and environmental complexity.
Bounded rationality limits our ability to have a
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The context of this research was the complex,
dynamic, mostly negative economic environment of
2008 through 2009. The general manager of Metals
described the downturn as ‘‘the perfect storm’’–—
sales volumes dropped through the floor, access to

complete and objective picture of a given situation,
and therefore causes us to satisfice in making
decisions rather than optimize (Simon, 1972). Bound-
ed rationality is similar to having your eyes closed to
some aspect of a situation. The more limited or
inaccurate the information is, the further from opti-
mal the decision will be.
capital dried up virtually overnight, and plummeting
commodity prices created significant problems for
suppliers that were left with large inventories of raw
materials for which they had overpaid. Some supply
chain managers–—like those in Auto, Safety, and
Shifters–—admitted they had fears of coming in on
a Monday and finding that a key supplier had closed

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 206
its doors over the weekend, putting their company
in a position of being unable to fill orders for neces-
sary parts and sub-assemblies.
In an attempt to alleviate these fears and keep
their eyes wide open, all of the supply management
organizations studied here initiated or escalated ex-
isting programs of supply risk assessment, focusing on
suppliers’ financial viability. In some cases, these
supplier risk assessments were performed internally,
while other companies like Safety utilized third par-
ties, hoping to reassure suppliers of neutrality and
confidentiality. The buyers were concerned that
as suppliers began to lay off employees, their sup-
pliers would lose important capabilities and subse-
quently be less competitive as they emerged from the
recession.
yo
3.1. Characteristics of key strategic
supply chain relationships
External supply chain relationships have often been
characterized in terms of types, with arm’s length
on one end of a continuum and strategic alliances on
the other end. The present research focuses on the
key strategic relationships that add significant value
op
to both parties and are characterized by frequent
and deep interaction, high levels of interdepen-
dence, longevity, and significant levels of social
capital (Liker & Choi, 2004).
While these close, mutually beneficial partner-
ships are often characterized as one type of
buyer-supplier relationship, our comparison of the
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relationship characteristics among the dyads points
to significant variability even within supply chain
relationships that the parties consider to be strategic
alliances. The range of these relationships–—based on
characteristics such as longevity, depth and breadth
of communication, levels of management involve-
ment, commitment, and dependence–—is shown in
No
Figure 1 (Ellram, 1991). Analysis of the dyadic rela-
tionships identified three strategic relationship
types:
 Evergreen–—parties have chosen to do business
together and have every intention of continuing
to do so indefinitely;
 Structural Alliance–—parties are bound together
by the fact that they are major players in a
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common industry and need the other party’s
business in the long run; and
 Contingent–—characterized by the belief that the
parties have an alliance, yet there is lack of
C-level support and willingness/ability for one
or both parties to aggressively adapt to changes.
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copyright. Permissions@hbsp.harvard.edu or 617.783.7860
L.M. Ellram, D. Krause
Figure 1. Types of supplier relationships
t
High
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Evergreen
Strategic supply
chain relaonship
Structural Alliance
Conngent
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Long-term contractual
Short-term contractual
Transaconal
Low
*Adapted from Ellram (1991)
Table 2 details key relational elements, roughly
ordered with the characteristics that are more com-
mon among the types at the top of the list, with the
less common at the bottom. Differences in degree
among these characteristics differentiate each of
the relationship types.
3.2. Evergreen relationships: The deepest
kind
The first type of relationship, Evergreen, is charac-
terized by long-term commitment with mutual be-
lief in the parties’ interdependence and shared
destiny. The parties in this partnership have very
strong social capital and confront difficulties to-
gether, short of anything save criminal acts or a
significant, disruptive technology. These parties
have purposefully invested a great deal in each
other and are connected at many levels with func-
tions across organizational boundaries, including–—
very importantly–—upper management. Managers
within these firms continually seek to align technol-
ogies, investments, and strategies. While one party
may be more powerful, another important aspect of
the relationship is that they adapt and change
together. There is a commitment to total cost re-
duction and taking costs out of the supply chain
while not diminishing value. In terms of bounded
rationality, firms are in the best position to optimize
the benefits of this type of relationship when there
is transparent, two-way information disclosure at
multiple levels between the organizations. Timely,
accurate, and relevant information helps reduce
the level of bounded rationality and thus allows
managers to make more optimal decisions.
 Table 2. Characteristics distinguishing key buyer-supplier relationships
Characteristic
Do
Self-description of pre-downturn
relationship
Supplier investment in specific assets,
including deep customer expertise
Believe they have a strong
interdependence
No
Importance of social capital
Behavior if there is margin pressure
Top management philosophies
Transparency in communications
regarding relationship
Mutual adaptation
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Bounded Rationality
Self-description of relationship post
downturn
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Evergreen
‘‘I could not imagine not doing business
with supplier X.’’
Yes: people, equipment, processes.
Yes; have no intention of ever ending the
relationship.
Essential; ongoing.
Transparency; we will willingly work this
out together, long-run balance.
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Compatible, with each party’s top
management aware of the other, buyer’s
top management values supplier.
op
100%; seek agreement and understanding
if differences. ‘Hash it out.’
Parties mutually adapt to support each
other because they must change with the
industry shifts for both to thrive. Both
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parties’ first choice is to continue the
relationship, even if some sacrifice is
involved.
Sharing of short-term and more strategic
information, including C-level
involvement to provide visibility to goals.
‘‘I could not imagine not doing business
with supplier X.’’
Structural Alliance
‘‘We will always do business together.’’
Yes: people, equipment, processes.
Yes; can’t really replace each other due
to industry concentration.
Not huge, but must balance over time.
One in power currently will determine
split, but it will even out in the long
run.
Very similar: both feel they are the
more important player in the industry
and deserve a larger share of the profit
yet they understand their co-
dependence.
Yes, but controlled by the party in
power, not really negotiated.
Parties mutually adapt with industry
shifts. Appeal of relationship shifts
depending on who has power, but they
have no choice except to work together
so that both parties survive.
Sharing of some information and
purposefully masking other information
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that could affect margins.
‘‘I understand that given the current
state of the economy we must give up
some margin today, but we will recover
it in the long run.’’
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Contingent
‘‘We trusted them. We had a great business
relationship.’’
Yes: people, equipment, design, but could
be used with other potential customers.
Buyer values supplier, but believes it is
replaceable; Supplier values buyer, but
won’t willingly move into lower margin
areas if supplier’s strategy changes.
Will dissipate if margins are threatened.
Each wants the other to absorb in short
term; limited transparency about long
term.
Not necessarily a meeting of the minds at
the top management levels. Buyer’s top
management may be unaware of and
uninterested in the supplier relationship or
value.
Unarticulated resentment builds due to
unexplained behaviors that the other party
does not question.
Robust supplier relationships: Key lessons from the economic downturn
Mutually beneficial equilibrium that can
shift with changing market conditions. As
that balance shifts, one or both parties may
choose not to adapt depending on their
perceived power and available
alternatives.
Sharing of current volume needs, limited
sharing of direction, and shifts in focus.
Changes shared as implemented.
‘‘The people there are great, but their
current approach to low-price bidding is a
bit disillusioning. They don’t know the hurt
they have caused.’’
207
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 208 L.M. Ellram, D. Krause

We found Evergreen relationships to be present in that before the two firms began negotiations, Safety

t
the cases of Auto with Shifters, and Safety with Stam- managers told Metals: ‘‘What’s good for us is good
ping and Plastics. One Shifters manager explained for you, and whatever we ask you for, be prepared to

that when the downturn began, Auto immediately
pulled together with its suppliers. He explained:
[Auto] was pretty quick to react and start asking
questions: ‘‘Is everything okay at your factory?
Are you prepared for this?’’ I saw. . .a more
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take in return.’’ The relationship has been charac-
terized by a ‘win-win’ mentality ever since. This
demonstrates a high level of commitment to mutu-
ality, which is foundational in building social capital.
From the outset of the downturn, Metals’ managers
noted that Safety communicated quickly, clearly,

candid approach to our business: Let’s get down
to work so we can both survive.
He went on to note that two-way communication
and sharing was essential to relationship success:
We have a very good working relationship with
them, and we fight and argue like brothers and
sisters sometimes. . . .But at the end of the day
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and regularly. They further noted that despite the
very cost-competitive nature of the industry, Safety
‘‘always tries to help [us] attain cost improvement.
While Safety is always looking for cost downs and
savings, it tries to help and support the effort.’’
A manager at Safety returned the compliment,
noting: ‘‘This supplier is creative, bringing us cost
cutting ideas.’’ For example, Metals ‘‘convinced us

yo
we’re all in it for the same thing, so it’s okay to
to start commodity hedging, and that has saved us a
argue. It’s okay to get mad. . . .We all know at
tremendous amount of money.’’ Another manager
the end of the day that we have a business
that works directly with Metals stated:
to run and we’re going to be providing good
quality parts tomorrow, just like we are today. This supplier is very cooperative. It is definitely
a partnership, involving both give and take. In
Shifters had to lay off workers for the first time in its
fact, at times I interact with [my Metals con-
history, and all remaining employees and manage-
tact] almost more than my wife. Our long-term
ment took a pay cut. One of Shifters’ managers went
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agreement is such that we both need each
on to note its commitment to the relationship,
other. This supplier made a huge capital invest-
explaining: ‘‘We still gave our customer a small
ment based on our commitment to his business.
cost-down even though we were bleeding to death
ourselves. It’s like I’ve only got one piece of bread, Based on the relationship characteristics identified,
but I’ll split it with you.’’ Auto’s managers agree with the relationship between Software and Services is
Shifters’ assessment of the relationship, noting: also Evergreen. However, neither of these firms, their
industries, or the relationship were affected as dra-
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Based on some support from us and a lot of

matically in terms of declining sales and profits as
effort of their own, they not only survived [the
others in this study. While there may have been
downturn], but they’ve created characteristics
opportunities for one or the other to try to take
on their production floor that will help them be
advantage, given the overall poor economy, neither
very competitive in the future. . . .We have no
did.
interest in losing them as a partner because
they’ve been a good supplier to us.
3.3. Structural Alliances: Shifting and
No

When asked to describe the relationship in more balancing

depth, one Auto manager responded:
Structural Alliance, the second type of relationship,
With our supplier partners we intend the rela-
is characterized by long-term commitment that
tionship to be forever. . . .We share openly
both parties acknowledge is affected by market
what our strategies are, where our production
tensions, changing technologies, and shifting dy-
volumes are going, where our production mix is
namics of power and dependence. These relation-
going, what we expect of them, and they share
ships are termed Structural Alliances because the
openly what their new product developments
buyers and suppliers are in connected industries and
are, where their technology is going, and often,
both are generally powerful, usually due to some
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their financial picture and business strategies.

Another example of an Evergreen relationship is
provided by the Safety-Metals relationship. As men-
tioned earlier, survival during the downturn forced
Metals to shrink its operations from five to three
plants and reduce its workforce by 60%. Metals
appreciated Safety’s mutual approach, explaining
combination of size and competencies and the fact
that they often have the upper hand with other
business partners. While they work closely together
on many initiatives, there is also a constant tension
as each struggles to be number one in their own
industries. These types of relations are similar to
duopolies: the parties must conduct business with

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 Robust supplier relationships: Key lessons from the economic downturn
each other due to small numbers of alternate sup-
pliers, economies of scale, and strong barriers to
entry. The constantly shifting power and purposeful
non-disclosure of information contribute to less-
than-optimal decisions to a greater extent in these
relationships than in Evergreen relationships. How-
ever, because the collection of industry players is
somewhat constant across the globe, each party
exercises mutual forbearance, acknowledging that
they are in the relationship for the long run and will
help each other as long as they are also helping
themselves. If a supplier doesn’t win a bid or con-
tract today, another opportunity with this customer
will be available in the near future. The demands
and pressures of each of these parties on the other
causes changes in each other (e.g., new technolo-
gies, demands). The parties are ‘too big to fail.’
yo
An example of a Structural Alliance adaptation
from our study is the relationship between Oil Tech
and Steels. Oil Tech allowed one of its key suppliers,
Steels, to maintain its price levels from before the
economic downturn while it worked through inven-
tories of steel that it had purchased prior to the
downturn. It then worked with this supplier of
specialty steels to combine orders and carefully
op
forecast demand to minimize the outlay of monies
for new steel purchases. In turn, the supplier shared
cost data and cost savings with its customer. As one
Steels representative noted:
Our products compete primarily at the high-
quality end of the market. . . .[Oil Tech] buys
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the product as a result of a long relationship
that has been developed on a basis of mutual
trust and our ability to meet stringent quality
requirements whilst remaining competitive.
The customer also increased the number of periodic
visits to the supplier and sent engineers to further
enhance the supplier’s production efficiencies.
No
While they battle back and forth, they recognize
the need to share essential information in order to
thrive in a dynamic environment.
Another Structural Alliance is illustrated by
Global Oil and Engineered Systems, one of Global
Oil’s key long-term suppliers. Within this relation-
ship, there is a constant give-and-take power strug-
gle whereby the position of each party varies
depending on the state of the economy and the
supplier’s latest technological breakthroughs. Prior
Do
to the downturn, Global Oil noted that Engineered
Systems had been in a strong power position be-
cause the industry was operating close to capacity.
Global Oil had been pushing for more competitive
pricing and had developed ‘should-cost’ models to
support its case and demonstrate that the supplier
was over-pricing. Engineered Systems essentially
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209
ignored this request until demand fell off during
t
the downturn. A Global Oil manager explained:
‘‘The change in the environment required us to
os
take some fairly drastic action. . .in what we were
paying for our materials and services.’’ Engineered
Systems began to cooperate and reduce its prices,
noting: ‘‘We were able to endorse this approach. . .
based on the trust we had previously developed
with [Global Oil].’’ There was two-way, full ac-
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knowledgement in this relationship that despite
the ongoing push-pull, the two parties would ‘‘al-
ways do business together’’ and ‘‘need each other.’’
Global Oil acknowledged: ‘‘If we see a return to
growth, [Engineered Systems] will be looking to get
back to the old price levels.’’ Social capital is
balanced over time, as each party seems to know
and respect its limits.
3.4. Contingent relationships: Testing the
alliance
Contingent relationships are represented by strong
ongoing commitment if market conditions remain
relatively constant. This is a committed relationship
that, unbeknownst to either party, is contingent on a
stable environment. It extends beyond typical con-
tractual relationships (Figure 1) in that the supplier
provides excellent value-added service such as
ideas, design, and quality production. There may
be many interorganizational relationships between
various functions across the organizations, but top
buyer management may not be fully aware of–—or
convinced of–—the value derived from the relation-
ship. Major changes or issues will prompt reevalua-
tion rather than immediate disclosure of concerns
because the parties are not mutually heavily in-
vested in the relationship. Many important supply
chain relationships fit within this category.
For example, a manager from Wine involved in a
Contingent relationship with Labels described a sig-
nificant change in the level of interdependence from
that of near-equal to Wine being dominant. With the
onset of the downturn, Wine found that the demand
for its higher-end product disappeared almost entire-
ly during late summer 2008. These market changes
affected the behavior of Wine, and also the power-
dependence structure of its relationship with Labels.
While Wine could change its label quite easily to
compete in a lower cost segment, Labels had signifi-
cant investments in equipment and personnel that
were not easily redeployed to other products, other
customers, or the lower-end market.
Before the economic crisis, Labels considered
Wine to be one of its most important customers in
terms of sales volume and collaboration. Their re-
lationship was growing and developing because of
 210
the unique value Labels provided to Wine’s high-end
product line. As consumer demand for this high-end
product dropped precipitously early in the down-
turn, Wine no longer valued the extra service and
quality provided by Labels. Wine’s lack of full dis-
closure to Labels regarding Wine’s management
directives prevented Labels from seeing this situa-
tion clearly. When Wine’s top management told
supply chain managers to move to reverse auctions
to further cut input prices on mid- to low-range
wines, Labels found itself an unwilling participant,
cutting prices to keep Wine’s business.
Thus, a dramatic but unspoken change in com-
petitive priorities for Wine resulted in powerful
changes to the relationship. Labels’ top managers
were both surprised and angry at the requirement to
participate in reverse auctions in order to retain
yo
business and to utilize some of the capacity it had
purchased in anticipation of continuing high-volume
demand from this customer. Labels felt it had been
blindsided by Wine’s behavioral shift. Labels’ top
executive explained:
People here are hurt. They bent over backward
to please [Wine]. . . .This low-price bid push did
op
damage to our employees’ perceptions of
[Wine]. They’ll never know some of the emo-
tional carnage our staff has suffered. . . .There
is a shift in tone.
While there had been a balanced social capital ex-
change prior to the downturn, this situation reminds
us that social capital can take years and many actions
tC
to build, but can be destroyed very quickly by the
actions of one party (Adler & Kwon, 2002). However,
the buyer’s own biases and limited information re-
flect its bounded rationality, as it was not aware of
the supplier’s feelings and responded by noting:
[Labels] is definitely our preferred supplier. They
make our life easy. They deliver on time, high
No
quality, and with good service. . . .[They have] a
can-do attitude, especially in comparison to
other suppliers. . . .We can count on them to
proactively help us when we are under pressure.
There was clearly a lack of transparency and open
information exchange by both the buyer and the
supplier in this relationship. It appears that the
business unit management dealing with Labels did
not get much advance notice of changes in strategy
Do
from the C-level, and that when they did, they were
non-negotiable edicts. More than any of the other
relationships studied, this particular relationship did
not have visibility and connection with the buyer’s
C-level management. The buyer thus introduced
significant changes in demands and expectations
without sufficient information or forewarning to
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L.M. Ellram, D. Krause
the supplier. The supplier did not clearly communi-
t
cate the hardship that these changes caused.
For all the companies, there were significant
os
changes in markets that engendered at least a
temporary shift in companies’ competitive priori-
ties. Early communication and collaboration in
working with these changes appeared to make a
major difference in how the parties viewed each
other’s behavior.
rP
4. What makes strategic buyer-
supplier alliances robust?
As interested observers of buyer-supplier relation-
ships for over 20 years, the researchers have wit-
nessed many trends and shifts–—even cyclical
patterns–—in how firms and industries view supplier
relationships. However, there are some supplier-
customer relationships that appear to endure and
successfully weather every storm. At a cursory level,
each of the three types of relationships identified
here look similar: high levels of interdependence with
each party claiming a long-term close relationship.
The before-and-after scenarios in the previous
examples are dramatically different, though. These
differences appear to be based–—at least in part–—on
varying degrees of bounded rationality, which man-
ifests itself in a variety of ways. To briefly revisit the
concept, bounded rationality means managers have
limited capacity to process and evaluate informa-
tion, that information isn’t always uniformly and
accurately available to all managers and may be
interpreted differently by those managers, and that
time is limited and managers must make decisions
with incomplete information.
In the Evergreen relationships, both parties had
strong commitments to maintain immediate trans-
parency of intentions, which increased social capital
while reducing bounded rationality due to lack of
information. In the Structural Alliance relation-
ships–—where, prior to the downturn, each party
attempted to keep the upper hand by purposely
withholding information–—the level of transparency
temporarily increased, reducing bounded rationali-
ty attributable to poor information as the parties
decided to fight the effects of the downturn togeth-
er by sharing resources and collaboratively minimiz-
ing costs. In both Evergreen and Structural Alliance
relationships, the parties held to the view that they
rely on each other in the long term, and for better or
worse their fates are linked. While they admit that
they did not agree on everything, they needed to
determine how to make things work for the good of
both parties. They had built positive social capital
prior to the downturn, continued building it during
 Robust supplier relationships: Key lessons from the economic downturn
the crisis, and made close-to-optimal decisions such
that they emerged from the downturn with an even
greater store of social capital.
In contrast, parties in Contingent relationships
entered the downturn with their blinders on, which
contributed to suboptimal decision making. In the
case of Wine-Labels, bounded rationality was man-
ifested through limited transparency of plans, lack
of information from the buyer’s top management
due to lack of top management involvement in the
relationship, and poor communication. Both parties
claimed to value the other highly, but as demon-
strated in the prior statements, had different views
of what that meant. As industry-wide volumes
dropped and the supplier became more dependent
on its customer, the customer leveraged that de-
pendency in the short run, seeking to maximize its
yo
own share of returns, which prior to that had been
shared jointly. Wine truly believed that it did not
damage the relationship, while Labels was con-
vinced that Wine was fully aware its behavior vio-
lated the spirit of the relationship and devalued the
social capital that had been accumulated. Wine did
not associate what it perceived as necessary short-
term behavior with the long-term relationship
op
damage perceived by Labels, further demonstrat-
ing non-optimal, satisficing behavior that is char-
acteristic of a high level of mutual bounded
rationality. Returning to the relationship continuum
in Figure 1, the Contingent type of relationship is
closest in relationship characteristics to a contrac-
tual relationship. It appears that the suboptimal
tC
behavior by both Wine and Labels is moving their
relationship farther from a strategic relationship
laden with positive social capital toward a more
contractual relationship.
Some of the long-term success factors that are
consistent across the three types of alliances are
based on very soft issues, such as common strategic
No
goals and high levels of interdependence. Yet there
are some key indicators that organizations should
consider in terms of how successful a particular
relationship might be in the long run, barring intro-
duction of disruptive technologies that render one of
the parties’ value contributions obsolete. Some of
the insights that can be gleaned from exploring the
relationships studied here are provided in the next
section.
Do
5. Lessons learned
While there are some lessons that apply to both
buyers and suppliers, others apply primarily to one
side of the relationship. The lessons gleaned from
these cases follow.
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211
5.1. Buyer’s perspective
t
Viewing supplier partners from a strategic stand-
os
point is more important than ever. Economic vola-
tility is just one of many factors, including weather
events and political events, which can and will
affect supplier relationships.
It is vital to consider the long-term, big-picture
perspective of what the supplier contributes to your
rP
organization’s success. Supply strategies must be
continually evaluated to ensure that they align with
the competitive strategies of your firm, with market
conditions, and with the supplier’s own viewpoint.
From upper management’s vantage, a supplier may
provide a simple input to a process; from an opera-
tional manager’s point of view, it may include process
inputs and expertise needed in the new product
development process. Keep in mind that if the sup-
plier has invested in equipment or personnel dedi-
cated to you as a customer, those portions of the
supplier’s business are dedicated to you 100%, re-
gardless of your purchase percentage of the suppli-
er’s output. If the supplier believes the relationship is
a Contingent type, it may be reluctant to make these
relationship-specific investments. This idea was not-
ed by Plastics’ managers, who indicated it would not
make capital investments if it thought the customer
was shopping its business to other suppliers.
5.2. Supplier’s perspective
A significant market upheaval may change your
customer’s markets in ways that are difficult to
anticipate. Such upheavals can test the relationship
in the sense that the value you currently provide to
the customer may diminish in their eyes. Thus,
flexibility is desirable at both operational and stra-
tegic levels. It can also be important to take inven-
tory of the types of industries your customers
represent and diversify these, if possible. Each
industry is affected differently by economic cycles
and conditions, which in turn may affect the value
you provide to your various customers. For example,
Plastics, one of the suppliers we talked with, spe-
cifically diversified into medical products to balance
the volatility of the automotive industry.
5.3. Lessons for buyers and suppliers
As suppliers and buyers enter long-term partner-
ships they believe will provide significant value to
their abilities to compete, both parties should con-
sider the following points:
 It is essential to acknowledge that all supply
chain partnerships can be affected by economic
 212
upheaval, such as declining customer demand and
changes in customer preference. Further, changes
within the relationship may not be experienced
equally by the two parties. One party may simply
feel some regret, while the other is impaired by the
loss of significant portions of its business and left
with idiosyncratic equipment and personnel. The
party facing greater potential risk needs to moni-
tor the relationship more carefully. This is also true
in an upturn, although the affected party here is
more likely to be the buyer who loses sales because
a supplier cannot keep up with demand surges.
 Transparency is essential as changes occur that
may affect the relationship. If you want to suc-
ceed in a long-term buyer-supplier alliance, you
need to take your blinders off to the greatest
yo
extent possible. While this is difficult to test when
times are good, some signs of increased bounded
rationality in a relationship include being surprised
by the other party and frequently learning about
changes in the other party’s plans after decisions
have been made–—that is, when they are being
implemented. One way to prevent that is to have
connections with the other party at many levels
op
and many functions. This helps create a well-
rounded picture. For example, Auto had an infor-
mal alert system during the downturn whereby
each party who interacted with suppliers made
note of what the suppliers said and alerted supply
management of potential problems or inconsisten-
cies in order to avert a surprise supplier shutdown.
tC
A good example of transparency is the way
Safety and Auto immediately contacted their sup-
pliers to find out how they were being affected by
the downturn, and communicated the expected
impact to suppliers. This effort reduced the uncer-
tainty each organization and their respective sup-
ply chains faced, and provided stability during
No
turbulent times. Global Oil and Engineered Sys-
tems let down their guards by sharing information
and cooperated more than usual, purposely reduc-
ing their bounded rationality so that they could
adapt and successfully emerge from the downturn.
Wine, on the other hand, announced changes as
it implemented them. This was due, in part, to
Appendix. Analyzing the dyadic data
Do
An extensive interview protocol was developed for the research to delve into competitive strategy,
industry issues, and the nature of the buyer-supplier relationship. The participants were asked mirror
questions based upon whether they were the buyer or supplier half of the dyad. The case companies
represented a wide range of industries from heavy manufacturing to services. Their names have been
disguised to protect their anonymity.
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copyright. Permissions@hbsp.harvard.edu or 617.783.7860
L.M. Ellram, D. Krause
lack of C-level commitment to the relationship
t
between Labels and Wine. Top management im-
plemented policies that required supply manage-
os
ment to essentially treat all suppliers equally–—and
competitively. Such communication is also essen-
tial in upturn, in order for all parties to be ready to
respond to increasing sales.
 Understand that interdependence is a dynamic
rP
and multi-faceted phenomenon, and build safe-
guards into the relationship. Customer-supplier
dependence goes beyond the percentage of sup-
plier’s output purchased to include a true picture
of the essence of what the supplier provides and
gains in the relationship. In the downturn, cost
became a more essential focus for each of the
buyers, yet most did not lose sight of the need to
retain good relations to ensure healthy suppliers
in the economic recovery. To reduce the risk of
increasingly suboptimal decisions, buyers and
suppliers should communicate frequently and
openly in times of change, especially times of
significant volume change such as an economic
downturn or recovery. As we saw in the case of
Wine-Labels, failure to do so can breed misunder-
standing and feelings of ill will.
 Understand how important your company is to
your partner. Customer-supplier commitment
and social capital at the local, operational level
does not necessarily reflect upper management
commitment. Upper management commitment
appears to be a key differentiator of Evergreen
relationships. That commitment is important to
obtain for firms to confidently invest in people
and equipment that are specific to the customer.
Every relationship is subject to stress, and the ro-
bustness of even the best relationships is open to
question. However, as noted by a manager at Auto:
‘‘The companies that used the economic downturn
as an opportunity to really change their character-
istics–—their fundamental characteristics–—not only
survived the difficult time, but if they maintain those
characteristics as the volumes come back up, will
thrive.’’
 Robust supplier relationships: Key lessons from the economic downturn 213

The researchers performed within-case analysis of the dyads by first having the interviews transcribed,

t
then comparing the answers to the mirror-image buyer and supplier protocols to gain a holistic
understanding of the buyer-supplier relationships. This also provided insight into the nature of the

os
relationship prior to the downturn and as the firms emerged from the downturn. In most, but not all cases,
there was a high level of agreement in how the buyers and suppliers viewed the relationship. This is
discussed in the results presented.

In addition to the interviews, the researchers obtained published articles about the buyers and suppliers,
reviewed their websites, and–—when available–—obtained presentations and documents related to their

rP
relationship practices. From this coding, key categories of relationship characteristics emerged, some of
which are highlighted in Table 2. It was from this comparison that the relationship classification emerged.

Khan, M. S. (2009). The 2008 oil price bubble (Policy Brief

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copyright. Permissions@hbsp.harvard.edu or 617.783.7860