The nature of the supplier-customer relationship has long been the subject of much research and debate both from academics and practioners alike. Since the 1990’s the term ‘Supply Chain Management’ (SCM) has been prominent in most literature published on the subject of supplier-customer relationships and this term is often used to describe the concept of such relationships. However, the term SCM does not always have the same meaning for either academics or for those organisations and individuals involved in the supplier-customer management process. This is because definitions of SCM may focus solely on the logistical aspects of integrated supply systems on the one hand or on a management philosophy on the other or sometimes on both (Cooper and Ellram, 1993). In the last ten years, however, there has been a growing body of opinion that believes that, when the term SCM is used, it should encompass the coordination of all of the processes and activities within and between the supplier and customer organisations (Cooper et al, 1997). Consequently, this literature review will regard SCM in the light of this viewpoint and focus on all of the various factors that characterise relationships between suppliers and customers.
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It is in the nature of business practice that supplier organisations are constantly seeking to develop closer relationships with their customers. They do this for various reasons such as improving on the time it takes them to deliver new products to the market and lowering their production costs. There are a number of different types of relationship that can evolve when a supplier and a customer decide to collaborate for mutual benefit. Heide and John (1992) drew a distinction between relationships based solely on transactions and those based on collaboration across various areas of business whereas Webster (1992) saw supplier-customer relationships as being about integration, acquisition and transactions.
In an attempt to draw all of the various relationship types together academics have produced various business relationship models. Probably one of the most prominent of these models was conceived by Golicic, Foggin, and Mentzer (2003) who proposed that a supplier-customer relationship was based on three basic configurations. These configurations are ‘arms-length’, ‘cooperation’, and ‘coordination’. ‘Arms-length’ is the type of relationship that occurs most often in the supplier-customer environment. It is often borne out of an adversarial selection process involving suppliers competing aggressively against each to secure a customer’s business. The resultant relationship between the successful supplier and the customer features low levels of commitment and trust and consequent low levels of information sharing and interaction. Such relationships tend not to add significant value to either business nor do they tend to endure. ‘Cooperation’ relationships are characterised by a significant two-way flow of information and relatively high levels of trust and commitment on the part of both parties, which may result in a longer-term partnership. In a cooperative relationship, both parties aim to work together to reduce both the buyer’s and the seller’s operational costs. These cost reductions may be achieved through the more efficient management of inventory and the elimination of unnecessary processes and procedures considered to be superfluous to the ongoing effectiveness of the relationship. Partnerships based on ‘coordination’ go a stage further than ‘cooperation’ and exhibit even more integration and sharing behaviour particularly with reference to resources such as IT infrastructure. At the ‘cooperation’ relationship level the two organisations involved will often consult on strategic business issues and implement joint initiatives for the benefit of both parties.
In view of its undoubted importance, it may be seen to be somewhat surprising that comparatively little research appears to exist about how organisations should go about measuring the value of the customer-supplier relationship (Anderson, 1995). Anderson also states that, even though the main reason for a supplier and a customer to engage in a relationship is for mutual benefits, such as adding value and/or reducing costs, neither academics nor practioners fully comprehend how the process works or how it can be measured. However, despite this, certain facets of the impact on business performance of supplier-customer relationships are capable of being measured. For example, data on customer retention rates and new customer acquisitions, together with their associated costs, can be gathered, examined and compared. Some researchers have concluded that there is little hard evidence that proves the financial value of customer retention (Dowling and Uncles, 1997). However, most academic studies do suggest that the costs of acquiring new customers are generally much higher than those associated with retaining existing ones. (Webster, 1994; Heskett et al., 1994; Cespedes, 1995). Although the quantification of these costs is not always easy, the effective management of supplier-customer relationships undoubtedly leads to increased levels of customer retention and lower costs for the supplier (Barr, 1996).
Researchers have also attempted to measure a number of other aspects of the supplier-customer relationship. Rinehart et al (2004) developed a model which measures a number of relationship factors including, amongst others, the frequency of communication, investment in relationship-specific resources, and the interdependence levels of each organisation in the relationship. To produce the model, data was gathered from CEO’s and senior executives at a number of manufacturing organisations in the USA. Following the analysis of the measurement of each relationship factor, an index was produced and used to identify trends in relationship types for suppliers and customers. The research concluded that there was a definite and identifiable trend towards ‘managed’ supplier-customer relationships that require high levels of trust and commitment and are often characterised by formal relationship agreements in the form of partnership or alliance contracts.
There are a number of contributory factors that influence the relative strength, or weakness, of any particular relationship between a supplier and a customer. For the relationship to flourish and be enduring there has to be an element of trust between the two parties. Without this trust then the relationship can founder at any stage of the process. Tompkins (2000) recognised the value of trust and indeed propounded the view that it is the cornerstone on which long-term business relationships are built. If this trust operates at a sufficiently high level it enables the two parties to focus on maximising the mutually beneficial nature of a truly committed and collaborative relationship (Morgan and Hunt, 1994). Furthermore, a level of trust sufficient to make a significant difference to a relationship does not simply manifest itself, however, it has to be nurtured. To nurture a culture of trust between a supplier and a customer, certain prerequisites are required. These may have their basis in either ‘affect’ or ‘cognitive’ forms or both (McAllister, 1995). ‘Affect’ forms are to do with how individuals within the two organisations behave and interact with each other and their counterparts whilst ‘cognitive’ forms are concerned with the similarities between the two parties in terms of ethnicity, culture and professionalism.
Whilst it is preferable to the success of the relationship that trust should pervade every part of each organisation, the key functional area where trust has to be seen to operate is sales. Kelly and Schine (1992) believe that the supplier salesperson must be trustworthy, and perceived as such by the customer, otherwise the entire supplier business operation may be viewed by the customer as untrustworthy. Naudé and Buttle (2000) support this view by stating that trust in the supplier salesperson to act in the long-term interests of the customer is key to the building of a strong supplier-customer relationship. However trust may be considered as a somewhat abstract concept by some businesses and, whilst it is undoubtedly a sound basis for a relationship, it will not, on its own, guarantee a successful partnership. Oliver and Delbridge (2002) purported that, as well as trust, there have to be certain rules agreed, documented and communicated that allow the two parties to share not just benefits but also any risks involved. They go on to state that the benefits accrued from such an approach are not just directly financial but are also technological and managerial.
Of course, as in any type of relationship, communication is also a critical success factor. Communication enables joint business objectives, strategies and tactics to be set and agreed and ongoing coordination to take place. Communication is also critical at the negotiation stage of the relationship between a supplier and a customer (Mohr et al, 1996). In order to share information, effective channels of communication first have to be constructed and maintained on an ongoing basis (Cooper and Ellram, 1993; Spekman et al., 2002; Morh and Spekman, 1994). These communication channels allow for the crucial exchange of information to take place between the two parties. Information exchange acts as a focal point for both parties and is recognised as a vital functional concept of successful supplier-customer relationships (Dwyer et al, 1987).
As well as information exchange, suppliers and their customers can enhance their relationships, and their respective business performances, though business integration at various levels. Derocher and Kilpatrick (2000) believe that businesses organised by function, i.e. production, human resources, sales etc., rather than by cross-functional, customer-focussed teams, have an inherent weakness insomuch as they lack the ability to successfully integrate their people with those of other businesses. This is because they are naturally inclined to look inwardly rather than outwardly. Conversely, the effective integration of customer and supplier into a new product development team, for example, can produce many benefits such as enhanced product performance, lower costs and higher quality (Ragatz et al, 2003).
According to Chin et al (2004) the most critical aspect of integration between two businesses is corporate culture. Corporate cultures can exert a powerful influence over how the managers and staff of an organisation behave and if the behaviours associated with the culture of the parties to the relationship are markedly at odds with each other then the relationship will never flourish. The senior management of both parties need to engender a common culture and develop special programmes for staff to ensure that any cultural changes required reach all levels of both organisations’ employees.
The quality of a supplier-customer relationship has a big influence over the general perception of quality by a customer towards a supplier (Gummerson, 1987). Equally, Gummerson states that the impact of a poor supplier-customer relationship can be to create a negative perception of general quality of the supplier’s business proposition. Poor supplier-customer relationships can be the result of the negative aspects of many relationship variables from lack of trust and commitment to dissatisfaction with the exchange of information and ideas process. The ultimate impact of negativity in a supplier-customer relationship is, according to Wilson and Jantrania (1996), the termination of that relationship.
The accepted thinking has long been that customer satisfaction was the prerequisite for customer retention. However, it is a fact that some dissatisfied customers will remain loyal to a supplier and, equally, some satisfied customers will leave (Buttle, 1999). A study carried out by Reichheld (1993) found that between 65% and 85% of customers who had recently defected from their supplier were found to be either satisfied or very satisfied with that supplier. Plainly there were other reasons for their defection. Reichheld surmises that those satisfied customers that left may well have been happy with the products they were buying and with the general level of service they were receiving but may have been unhappy with the general nature of the business relationship or they may have simply wanted a change for changes sake.
From WP plastics point of view it will be some consolation that these so called ‘variety seeking’ customers, appear to be concentrated in a number of specific product and service industries such as financial services and food services (Naudé and Buttle, 2000). However, in manufacturing industries too, there are certainly aspects that influence the strength, or weakness, of a supplier-customer relationship other than the simple concept of customer satisfaction. For example, the ‘bond’ that exists between the two parties may act as a barrier to defection by the customer even in the light of dissatisfaction (Storbacka et al, 1994).
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A poor supplier-customer relationship may also manifest itself as a lack of commitment to the supplier from the buyer. Wilson and Mummaleneni (1986) support this position in their description of how relationships develop. They state that commitment does not come naturally but is something that has to be earned through the investment of time and energy in the relationship. They go on to say that it is unlikely that a supplier will earn commitment from a buyer if the transactions between to the two parties are not satisfactory. Gulati (1995) concurs with this assertion and states that poor customer supplier-relationships may occur most often if those relationships are based exclusively or mainly on transactions. Gulati also believes that supplier organisations should increasingly deploy order and fulfilment systems based on technology, such as web based sales catalogues, in order to keep transaction costs with such customers to a minimum so as to mitigate losses if the relationship does not last. Whilst a lack of commitment may predispose a customer to defection, Wilson and Mummaleneni (1986) also believe that the unavailability of suitable alternative suppliers may force a customer into a relationship with a certain supplier that results in a kind of ‘negative’ commitment on the part of the customer. This will ultimately only serve to have a negative impact on the overall relationship and ultimately will probably lead to its breakdown.
Although manufacturing businesses may believe that they understand the needs of their customers, they should recognise that individual customer organisations often have different and distinctive needs and wants. Therefore, it is crucial to the success of the supplier’s relationship, and business performance, with its customers to gain an understanding of the various attitudes and perceptions that customers may have, both towards its business and its products, and how these can be influenced. For example, a particular customer of a supplier may focus strongly on product or service attributes at the expense of other issues such as price and brand reputation. The importance ranking of these types of factors by customers varies according to how strategically important the product or service is to the buyer. Rader et al (2010) have classified the types of buying decisions that customers make and why they make them in terms of the attributes that influence the decision making process.
The first attribute is the degree of involvement by the purchaser in the buying decision and this is determined by the strategic importance to the buyer of the supplier’s product. As well as the product’s relative importance to the buyer, the cost of the product is also a significant facet of this ‘involvement’ attribute. The second attribute is the difference that a buyer perceives between the products and service it will receive from the various suppliers it may be considering. This difference will encompass such characteristics as convenience, service and quality. Finally, the third attribute is how much time the buyer has available to consider the product purchase. For low involvement products a buyer will typically restrict the time allocated to product consideration. In WP’s case it supplies relatively low cost plastic products to the packaging and building materials industry. These may not be of particular strategic importance to the customer and, therefore, probably will not warrant a significant investment in time from the purchaser. So according to Rader et al products, such as those produced by WP, are likely to have low involvement attributes on the part of the buyer. In view of these attributes and how they apply to WP, as described by Rader et al, then customer service is potentially a significant differentiator.
However, whilst plastics products may be low involvement, there is also a evidence of a growing trend for the customers of manufacturing suppliers generally to take time to seek out and consolidate relationships with fewer manufacturers than they may have done in the past (Kalwani and Narayandas, 1995). Indeed, a model created from research carried out by Wilson (1995) goes a stage further by suggesting that many buyers in the business-to-business arena are focussing on developing relationships with just one supplier because the pressure to reduce cots, reduce inventory, and improve quality are so intense. Such buyers believe that they are able to negotiate from a position of strength if they can offer exclusivity of custom to the supplier.
This, together with the fact that customers have certain basic and identifiable needs from their suppliers, means that suppliers need to pay increasing attention to the satisfaction of customer needs if they are to forge effective and enduring relationships. For example, in the business-to business-marketplace within which WP operates, it is necessary for the supplier, when designing a new product, to consider what the onward distribution costs for the customer will be and whether or not the new product is compatible with its customer’s own inventory control systems (Lee and Billington, 1992). In the highly competitive worldwide marketplace that now exists, suppliers are under growing pressure from customers to lower their costs to help those customers compete more effectively (Grundy, 1996). Customers are paying more and more attention to finding those suppliers that will help them lower their costs. Suppliers such as WP, who are in the manufacturing business, generally have some scope to reduce their costs and pass on, at least in part, the savings made to their customers. After all, over half of the typical manufacturer’s operating costs are associated with materials processing, an area where cost savings can always be sought and often found (Heberling, 1993). Supporting this position Rauyruen and Miller (2007) have identified two very specific needs of the typical customer which are (i) the customisation of the products they are going to buy and (ii) the application of a customised pricing structure for those products.
There are other criteria that will influence a customer’s choice of supplier. The Supply Chain Council (SCC, 1999) has identified these criteria and categorised them into four distinct areas which can be summarised as follows: (i) Reliability of the delivery process, which includes how quickly and how accurately orders are fulfilled; (ii) responsiveness and flexibility in terms of the suppliers production process and response time; (iii) cost of the management process involved in fulfilling orders and managing inventory plus the cost of warranty claims and returns; and (iv) the number of days of inventory supply available at any given time.
From the supplier’s point of view, an insight into what the customer needs is plainly an advantage in terms of building a strong relationship with that customer. However, for a supplier to truly be able to identify and satisfy the specific needs of its individual customers, and be in a position to respond to those needs, the supplier first has to either possess, or adopt, a ‘market orientated’ approach to the way it does business. Market orientation can be defined in a number of ways. Some definitions view it as a cultural activity based on an organisation’s values (Deshpande et al 1993; Shapiro 1998) whereas others focus on how an organisation behaves in terms of its application of market-orientated principles, such as customer intelligence gathering (Kohli and Jaworski, 1990). Ruekert (1992) lists three specific components of market orientation, namely: (i) the acquisition and use of customer intelligence; (ii) the development of a proactive business strategy, the objective of which is to satisfy customer needs and (iii) the implementation of a reactive strategy that effectively manages customer orders and enquiries.
A key factor in an organisation becoming more market orientated is to move away from a purely product and sales driven business philosophy towards a customer needs and relationship development approach. Gummerson (1991) summarises this approach as one of enhancing customer perceived value.
Gummerson also describes the necessity of interaction between the relationship parties for the purposes of intelligence gathering. He sees this process as a crucial part of the development of a long term relationship which, in turn, forms the basis for an effective market-orientation strategy for the supplier. The market orientation of a supplier organisation can be developed using market research techniques to gather data about the market in which it operates. Ruekert (1992) believes that this research should have an emphasis on the market position required rather than on short-term business gain and profit. Ruckert also states that the pricing structure offered to customers should be such that the customer has a high perceived value of what it is purchasing.
Some academics and practioners might argue that market orientation is the single most important factor for manufacturing suppliers to consider in their relationships with customers because it places the highest priority on business profitability for the supplier but from the viewpoint of delivering superior value to the customer so both parties win (Shapiro, 1988). This is a fine sentiment but a supplier organisation needs an operational framework so that it can better understand the nature of market orientation and how it must adapt its operational procedures in order to encompass it. Kohli and Jaworski (1990) provide valuable insight into this dilemma with their view that market orientation demands that an organisation adopts a process of market intelligence gathering to better understand its customers needs and that it also takes responsibility for disseminating this intelligence throughout its business to ensure that all staff understand, respond and accept responsibility for it.
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