Supplier development: Practices and measurement

M. Sulungbudi

Universitas Katolik Parahyangan, Bandung, Indonesia

V. Yanamandram & S. Akter

University of Wollongong, Wollongong, Australia

L. Tam

University of Technology, Sydney, Australia

ABSTRACT: When competition is no longer among firms yet among supply chains, firms are encouraged to establish beneficial collaborations in the supply chain.

1 INTRODUCTION

Resource scarcity, technological change acceleration, market shifts, global competition, political turbu­lence and government intervention in supplier mar­kets have led firms to pay attention to the purchasing function as a strategic function, and to the need to manage supplier relationships in addition to cus­tomer relationships (Hahn et al. 1990). Traditional supplier relationships, where firms relied on sup­pliers in product and technology R&D, are no longer considered sufficient, with a closer and more collab­orative approach being suggested by scholars (Blenkhorn & Banting 1991).

Supplier development is defined as any effort taken by a buying firm with its supplier to increase performance and/or the capabilities of the supplier to meet the buying firm’s supply needs (Krause and Ellram 1997). A customer/buyer may assist a sup­plier to improve its capabilities and performance through various combinations of supplier develop­ment activities (Hines 1994, Sucky & Durst 2013). On the other hand, a supplier may access important knowledge, and develop, coordinate, and integrate a new set of capabilities with its customer through supplier development that could lead to performance improvement (Danneels 2002).

Indonesian firms, with their collectivist culture (Hofstede et al. 2010), may value supplier devel­opment as more important considering it to be relationship investment which would be less the case in countries with individualist cultures (Barry & Doney 2011). One indication of the col­lectivist culture is the common practice of associ­ations and collaboration culture that is called gotong-royong (YDBA 2014). The gotong-royong culture is the reason why Indonesians are accus­tomed to collaborating in groups to attain a shared goal and to prioritize common interests over private interests (Nasroen 1967, Taylor et al. 1991). Therefore, the Indonesian automotive industry might provide one of the best examples of inter-supplier collaboration, when considered in addition to Japanese manufacturers as the initi­ator of inter-supplier collaboration.

The purpose of this study is to develop a measure of supplier development with the inclu­sion of customer support in inter-supplier collab­oration. Sections to follow discuss the types of supplier development practices, item generation for each dimensions of supplier development measurement, and findings from Indonesia auto­motive industry.

2 SUPPLIER DEVELOPMENT PRACTICES AND TYPOLOGIES

Various ways can be employed to support a sup­plier’s performance.

2.1 Training and education

For a long time, training and education have been known as supplier development efforts used by large multinational companies (MNCs) to share common knowledge and best practices. Toyota has been pro­viding various training programs for its supplier associations (kyohokai) since 1943 (Dyer & Nobeoka 2000). Boeing started to train its suppliers in statistical quality control in the 1980s (Leitner 2005). However, supplier training and education were not really popular and tended to be avoided in the US in the late 1990s, due to the need for long­term commitment by customers (Krause 1997).

2.2 On-site consultation

Suppliers, by themselves, often do not have suffi­cient knowledge on how to improve their perform­ance and tend to appreciate customer support or help in the form of on-site consultations (Krause et al. 2000). Customers can perform consultations or pro­vide advice to suppliers in one or more specific areas, such as quality management, manufacturing processes, and technology and product development. Customers may also guide their suppliers to adopt best practices, for example, Toyota with its Toyota Production System (TPS) (Dyer & Nobeoka 2000).

2.3 Employee exchange

The practice of employee exchange is well known not only among Japanese firms, but also in other Asian firms. The literature documents that Toyota practices employee exchanges with suppliers, called shukko (Dyer & Nobeoka 2000).

Employee exchange between a customer and a supplier can be done in two ways: co-locating the customer’s engineers to the supplier’s facilities or transferring the supplier’s engineers to the custom­er’s facility. Employee exchange facilitates intensive communication between engineers from the two firms that enables tacit knowledge exchange between the two parties (Nonaka 1994).

2.4 Supplier evaluation

Evaluating supplier’s performance, comparing sup­plier’s performance with expected performance and planning supplier improvement are considered as the fundamental activities of supplier development (Wagner 2006). Customers may evaluate suppliers based on capabilities, performance, processes in management and/or technical areas (Purdy et al. 1994). By providing feedback and improvement tar­gets to the supplier, customers influence suppliers to change their behavior to achieve targets.

Supplier evaluation can be regularly or occasion­ally, quantitative or qualitative, formal or informal. Giunipero (1990) found that 46% of his survey respondents used quantitative evaluation to motivate their suppliers to improve their product quality, while 10% of the respondents used a qualitative sup­plier’s performance review. Watts & Hahn (1993) reported that 75% of their respondents from the US evaluated suppliers regularly, but only 47% used formal evaluation.

2.5 Future business incentives

Once supplier evaluation is complete, incentives can be used to motivate suppliers to change their behav­ior to achieve improvement (Frazier & Summers 1984). Some business incentive practices were docu­mented in supplier development publications, such as promises of higher volume orders of present items and consideration of future business upon improving their performance, sharing the cost savings achieved due to performance improvement, and recognizing supplier improvements through awards (Giunipero 1990, Krause 1997, Krause et al.

2.6 Customers’ support in inter-supplier collaboration

With a tendency to have small supply bases, firms tend to influence their suppliers to collaborate with other suppliers, meanwhile maintaining the distance between suppliers to balance collaborative synergy and competition. Many firms advise that the relation­ship between themselves and their suppliers is crit­ical (Asanuma 1989) and demand that suppliers collaborate on various projects (Wasti & Liker 1999). This inter-supplier relationship is called “co- opetition” (Choi et al. 2002, Wu et al. 2010). Sup­pliers are expected to be aware that not only do they have to compete for survival, but they also need to collaborate in learning processes. Suppliers are encouraged to communicate with each other directly and sometimes to exchange materials for efficiency; meanwhile, they are also reminded that they compete to supply similar, or the same, products.

In 1939 in Japan, Toyota established a supplier association, kyoryoku kai, and then, in 1943, renamed it as kyohokai (Nishiguchi 1994). Kyohokai was successful in facilitating information exchange and mutual development between members (Dyer & Nobeoka 2000). In 1989, Toyota replicated kyohokai in the US as the Bluegrass Automotive Manufactur­ers Association (BAMA). In 1977, Toyota also facilitated knowledge sharing in “voluntary study groups” (known in Japanese as jishukenkyu-kai, kojo jishuken or jishuken) where suppliers assist each other to achieve a specific common goal, such as improvement in quality and products (Dyer & Nobeoka 2000). In 1994, Toyota imitated the jishu- ken in the US by establishing plant development activity (PDA) core groups. Unfortunately, in the first two years, the PDA core groups were not as suc­cessful as jishuken.

2.7 Competitive pressure

When customers use multiple suppliers to obtain a resource, competition builds between suppliers (Hahn et al. 1986). Inter-supplier competition is trad­itionally used to force suppliers to improve their cap­ability and performance (Giunipero 1990), especially when the customer uses a low purchase price pur­chasing strategy (Hahn et al. 1986). Although com­petitive pressure is considered to be part of supplier development, the supplier development literature suggests that competitive pressure has many draw­backs: resulting in high transaction costs, deteriorate customer-supplier relationship, poor product quality and poor communication between the supplier and the customer (Liker & Choi 2004, Hahn et al. 1986, Krause 1997).

2.8 Capital investment and financial support

Small suppliers sometimes find that they cannot afford to provide the equipment and tools needed to improve their performance, or that they do not have access to the capital needed (Choi 1999). Blenkhorn & Banting (1991) and also Biemans & Brand (1995) suggested that customers could provide financial support to a new developing supplier that was expected to fulfil the customer firm’s needs.

Ford was among the first organizations reported to have supported its suppliers with capital assets (Seltzer 1928). A successful Korean electronics company supports its suppliers financially. As a result, this support helped one of the suppliers to increase its annual sales tenfold which then benefited the customer with millions of dollars of savings (Choi 1999).

Various typologies, as discussed below, have been used in the literature on supplier development activ­ities, the most common typology being based on the level of the customer’s involvement in activities or resource investment (Krause et al. 2007, Sucky & Durst 2013). Krause (1997) proposed three factors of supplier development, namely direct firm involve­ment, incentives, and enforced competition. He defined direct firm involvement as active involve­ment and resource investment in the supplier’s efforts to improve performance. He also stated that the three factors of supplier development might be used in any combination as the activities are inde­pendent and complement each other. Krause et al. (2000) and Krause & Scannell (2002) categorized supplier development as direct involvement, supplier assessment, supplier incentives and competitive pressure.

Modi & Mabert (2007) partially replicated Krause et al.’s work and proposed “operational knowledge transfer activities” to replace their dimension of “direct involvement supplier development activ­ities”. Scannell and Calantone’s work also used com­petitive pressure, evaluation, certification and future business incentives as other dimensions of supplier development.

Humphreys, Li, Chan and colleagues (Humphreys et al. 2011, Humphreys et al. 2004) proposed that transaction-specific supplier development and infra­structure factors of supplier development influence customer-supplier’s performance improvement. Humphreys et al. (2004) defined transaction-specific supplier development as a core practice of supplier development that represents the direct involvement of the buying company in developing suppliers. Humphreys and colleagues added capital support and recognition of supplier progress in the form of awards as parts of transaction-specific supplier development.

The current study adopts Wagner’s direct supplier development definition of a customer’s commitment or investment to transfer its knowledge as relation­ship-specific resources to its supplier in order to improve the supplier’s capability and performance (Wagner 2010). In addition, supplier evaluation, future business incentives and inter-supplier collab­oration were suggested as the customer’s communi­cation approach used to force or encourage its supplier to improve its own performance and/or cap­abilities (Wagner 2010).

3 GENERATION OF SCALE ITEMS

Wagner’s scale of direct involvement supplier devel­opment was adapted to reflect this conceptualization (Wagner & Krause 2009, Wagner 2011, Wagner 2010), as it thoroughly identified key activities of supplier development and based on systematic scien­tific discussions on supplier development (Sucky & Durst 2013). The direct involvement supplier devel­opment scale consists of seven items, with each of these items representing activities that show custom­er’s commitment to transfer knowledge.

In addition to direct involvement, the current study adopted four items measuring supplier evalu­ation from the scale developed by Wagner (Wagner & Krause 2009, Wagner 2010); four items on the scale measuring future business incentives from Modi & Mabert (2007); and six items on the scale measuring the customer’s support in inter-supplier collaboration from Wu et al.’s scale of buyer influ­ence (2010). Wu et al.’s scale of buyer influence was adopted to measure the customer’s support in inter­supplier collaboration since each item of the scale represent activities that show customer’s support in inter-supplier collaboration. The current study did not measure competitive pressure due to its tendency to have a negative impact on performance and on the customer-supplier relationship, leading to its avoid­ance in the customer-supplier cooperative relation­ship (Shahzad et al. 2016, Wagner 2010).

A six-point Likert scale measuring the degree of agreement with the items ranging from ‘strongly dis­agree’ to ‘strongly agree’ was applied to measure the multi-item variables used in the current study. Scales were reworded to make it possible for the items to be interpreted from the point of view of the supplier as respondents of the study. All items in the ques­tionnaires were pre-tested in Indonesian, and changes were made to the English version and Indo­nesian versions iteratively. The final Indonesian ver­sions were later translated back to English by a professional translator for a validity check.

4 DATA COLLECTION

A list of original equipment manufacturers (OEMs) in the automotive industry that were representative of the desired target population was obtained from a report of the Association of Indonesian Automotive Industries (GAIKINDO, 2014). The report listed 14 OEMs; how­ever, information was inadequate as to whether all these OEMs were providing supplier development for their suppliers. The current study focused on the auto­motive industry due to its size and relevance in the economies of Indonesia and South East Asia. Emails were sent to each of the 14 OEMs listed in the associ­ation, asked if they would be able to assist in the recruitment of respondents. Four OEMs, who had more than 60% production share of the industry, indi­cated their willingness to provide supplier lists. They came from the first and second of the four biggest con­glomerate corporations that are engaged in the Indones­ian automotive industry. The four firms were identified as Firm A, B, C, and D in the current study.

In total, 376 suppliers were on these supplier lists. However, some suppliers’ names were duplicated indicating that some suppliers had received supplier development from more than one customer. In all, 310 distinct suppliers were on the final consolidated supplier list.

The data collection techniques of the current study were a combination of closed web question­naires, emails with attachment questionnaires, and group distribution of paper questionnaires. The appearance of the questionnaires attached to the emails was similar to the paper questionnaires. The target respondents were given a choice of the most convenient survey instrument for them to respond to in the study. Of the 310 questionnaires distributed, 31 pairs of questionnaires were completed via web questionnaires, five pairs were completed via web and paper questionnaires, and 127 pairs were com­pleted via paper questionnaires. Of 158 complete responses, 151 responses from 100 suppliers were usable. The questionnaires that were discarded (seven cases) failed to meet screening criteria, had severe amounts of missing data or were found to be multivariate outliers. The sample characteristics can be found in Table 1.

Table 1. Sample characteristics.

* Suppliers may support the customer with more than one product category.

5 ANALYSIS

Confirmatory factor analysis (CFA) was conducted to examine and refine the measurement model of supplier development. Appendix 1 presented 21 items to measure the four dimensions of Supplier Development construct.

Some of the standardised regression weights for the supplier development initial measurement model had moderate loadings and their item reliability coef­ficients or squared multiple correlations were less than 0.50. Therefore, the initial model had to be revised to meet the CFA requirement. The initial measurement model of supplier development was revised two times, by removing one indicator at a time, with all the indicators of Direct Involvement and Supplier Evaluation retained. One indicator of Future Benefit (SuD_FB_03) and one indicator of Inter-Supplier Collaboration (SuD_IC_06) were eliminated for their low loadings and squared mul­tiple correlation values. The resulting fit indicators were χ² = 242.698, df = 146, p = 0.00; Bollen-Stine bootstrap p = 0.367; χ2∕df = 1.662; TLI = 0.939; CFI = 0.948; RMSEA = 0.066 (0.051; 0.081); SRMR = 0.057. The standardized regression weights, critical ratios and squared multiple correlation are presented in Table 2. As indicates, the standardized regression

Table 2. CFA results for first-order models.

Supplier Evaluation

Future Business Incentives

Supplier Evaluation (First-Order)

Future Business Incentives (First-Order)

* statistically significant, p < 0.001, n=151

being 0.483 (SuD_Di_03) that also acceptable for analysis (Cunningham 2008).

The critical ratios of all observed variables are above 1.96, with the lowest value being 8.201, indi­cating statistical significance of parameter estimates (Joreskog & Sorbom 1993, Byrne 2010). None of the standardized residual values exceed the cut-off point of ∣2.58∣(Joreskog & Sorbom 1993). Although some of MIs were somewhat larger than 7.882, their par change were not greater than 0.40, this indicates there is no modification that would improve the par change high enough, suggests it is no need to remove or modify any indicator (Joreskog & Sorbom 1993). The results were consistent with the first-order construct model. Therefore, supplier development could be analyzed as a second-order construct in the structural model (Cunningham 2008).

The correlations between the second-order con­struct with its four first-order constructs and with all 19 indicators were significant (p < 0.001), sup­ported the nomological validity of the supplier development scale and confirmed that supplier development was validated as a second-order con­struct model (Spiro & Weitz 1990).

6 CONCLUSION

CFA supports the view that supplier development is a higher-order construct. To the best of the researcher’s knowledge, there is no previous empir­ical study that proposed and tested direct involve­ment, supplier evaluation, future business incentives, and customer support in inter-supplier collaboration as first-order constructs of the higher- order supplier development. Therefore, although customer support in inter-supplier collaboration has never been included as a factor of supplier develop­ment in supplier development empirical studies, the current study confirmed that inter-supplier collabor­ation is a part of supplier development. This finding is based on the concept of “co-opetition” that bal­ances collaborative synergy and competition among suppliers suggested by Choi et al (2002), Hines’s (1994) prescription to facilitate supplier association and supplier development literature that reported supplier development best practices (Nishiguchi & Beaudet 1998, Dyer & Nobeoka 2000, Stuart & Deckert 2009, Stuart et al. 1998). The inter-supplier collaboration is important and has big opportunity to develop in Indonesia, since Indonesia is a country with a collectivist culture, the gotong-royong culture causes Indonesians to collaborate to attain a shared goal (Nasroen 1967, Taylor et al. 1991) and the automotive industry in Indonesia is dominated by Japanese multinational companies, which, reported utilizing supplier asso­ciations (Hines 1994, Nishiguchi 1994, Dyer & Nobeoka 2000).

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Appendix 1

Direct Involvement:

SuD_Di_01: Customer X undertook supplier devel­opment with our firm through giving manufactur­ing-related advice (e.g. processes, machining process, machine set-up)

SuD_Di_02: Customer X undertook supplier devel­opment with our firm through training of our employees.

SuD_Di_03: Customer X undertook supplier devel­opment with our firm through transferring their employees to our facilities.

SuD_Di_04: Customer X undertook supplier devel­opment with our firm through giving product development-related advice (e.g. processes, pro­ject management).

SuD_Di_05: Customer X undertook supplier devel­opment with our firm through giving techno­logical advice (e.g. materials, software)

SuD_Di_06: Firm X undertook supplier develop­ment with our firm through giving quality-related advice (e.g. use of inspection equipment, quality assurance procedures)

SuD_Di_07: Customer X undertook supplier devel­opment with our firm through transferring our employees to their firm.

Supplier Evaluation

SuD_Ev_01: Customer X undertook supplier devel­opment with our firm through setting improve­ment targets

SuD_Ev_02: Customer X undertook supplier development with our firm through auditing our firm

SuD_Ev_03: Customer X undertook supplier devel­opment with our firm through providing feedback about our performance

SuD_Ev_04: Customer X undertook supplier devel­opment with our firm through strong formal sup­plier evaluation

Future Benefit

SuD_FB_01: Customer X promised increased volume order of items supplied by our firm for improving current performance

SuD_FB_02: Customer X promised consideration for improved business in the future for delivered improvements in our performance

SuD_FB_03: Customer X shared the cost savings achieved due to our performance improvements

SuD_FB_04: Customer X recognised our improve­ments through awards

Inter-supplier Collaboration

SuD_IC_01: Customer X provided occasions (e.g. social settings, meetings, forums and conferences, etc.) where suppliers can meet and talk.

SuD_IC_02: Customer X encouraged suppliers to work together on operations issues (i.e. quality, delivery, forecast, process engineering, etc.).

SuD_IC_03: Suppliers’ ability to work as a team was an important supplier evaluation/selection criterion for Customer X.

SuD_IC_04: Customer X’s contractual agreements promoted collaboration between suppliers.

SuD_IC_05: Customer X encouraged suppliers to help each other out if we encounter production problems.

SuD_IC_06: Customer X encouraged suppliers to coordinate our activities without their direct involvement.