Portfolios of Buyer-Supplier Relationships

A survey on supplier relationships administered to 447 managers from the major U.S. and Japanese automobile manufacturers showed that these firms do not manage primarily by strategic partnerships, but instead participate in various types of relationships. The author proposes and empirically validates a framework for managing a portfolio of relationships that will help senior managers answer two key questions: Which governance structure or relational design should a firm choose under certain external contingencies? What is the appropriate way to manage each type of relationship?

The survey examined the specific investment of buyers and suppliers from both national samples in four types of relationships: strategic partnership, market exchange, captive buyer, and captive supplier. Interestingly, the level of investment made by either party in every type of relationship significantly correlated with practices commonly associated with strategic partnerships, such as long-term relationships, mutual trust, cooperation, and wide-scope relationships that include multiple components.

No one type of buyer-supplier relationship — not even the strategic partnership — was inherently superior, which suggests that each can be well or poorly managed. Firms successfully manage supply chains by matching relationship type to specific product, market, and supplier conditions and by adopting an appropriate management approach for each type of relationship.

Findings also countered the popular belief that Japanese firms tend to manage their suppliers using highly dedicated relationships or strategic partnerships. They appear to conduct business with a smaller ratio of strategic partnerships than is commonly believed (19 percent of the sample) and to extensively use market-exchange relationships (31 percent) — a practice usually associated with Western manufacturers.

The author provides a contextual profile of product and market conditions most conducive to each type of relationship and discusses the management features common to the best performers in each category. By consciously and systematically matching the design of each relationship to its external context, product executives can stifle the urge to join the sweeping fad of strategic partnerships and avoid underdesigning and overdesigning external relationships.