Competition or Cooperation? Promoting Supplier Performance with Incentives Under Varying Conditions of Dependence

• Date: 01 October 2015
• Published date: 01 October 2015
• Author: Regis Terpend,Daniel R. Krause
• DOI: http://doi.org/10.1111/jscm.12080

COMPETITION OR COOPERATION? PROMOTING

SUPPLIER PERFORMANCE WITH INCENTIVES UNDER

VARYING CONDITIONS OF DEPENDENCE

REGIS TERPEND

Boise State University

DANIEL R. KRAUSE

Colorado State University

In this study, we use the lens of social exchange theory to investigate the

influence of incentives on supplier performance under various conditions

of buyer–supplier dependence. We propose that incentives generally fall

into two main categories: competitive, market-based incentives that reward

suppliers based on how well they perform relative to other suppliers, and

cooperative incentives, where both buyer and supplier share benefits based

on their joint performance. Using empirical data collected from 230 buy-

ers in a sample of U.S. industrial firms, we measure the effects of these

two types of incentives on various measures of performance, as well as

the moderating effects of buyer–supplier dependence. Our results suggest

that competitive incentives can be an effective approach to improving

delivery, quality, innovation and flexibility, for purchases where the

buyer–supplier relationship is characterized by balanced and moderate

amounts of mutual dependence. However, competitive incentives are inef-

fective at generating improved cost performance. Cooperation appears to

be the only way to improve cost but is only fruitful under conditions of

high mutual dependence. In general, we find that high mutual depen-

dence provides a good basis for cooperative incentives to successfully

improve each of the types of performance included in our study. Finally,

we find evidence that cooperation and competition can coexist without

significant risk of decreased performance.

Keywords: buyer–supplier relationships; purchasing performance; dependence;

power; cooperation; competition; social exchange theory; hierarchical regression

analysis

INTRODUCTION

Zimmermann and Foerstl (2014) recently argued

that there is a need to better understand the link

between various purchasing practices and performance

and to identify the moderating variables that affect

that link. The use of incentives has been widely

explored and documented in the fields of psychology

(e.g., effects on learning and motivation) and organi-

zational behavior (e.g., effects on employees’ motiva-

tion and performance). In supply chain management,

the bulk of the research on incentives has been con-

ducted through analytical research. However, there

has been little empirical research investigating how

the use of incentives applies to supplier performance

improvements, and under what conditions. This gap

in the literature is surprising given that incentives

could be a powerful tool for buyers who seek to pro-

actively manage supplier performance.

In managing supplier relationships, many firms

operate under the assumption that the forces of the

market will naturally operate as a profit maximizer

(Narayanan & Raman, 2004). However, a large

number of firms are unsuccessful at operating in a

way that maximizes profits. One cause of less-than-

maximum profit resides in the misalignment of sup-

ply chain incentives resulting in excess inventory,

October 2015 29

backorders, and wasted efforts (Cachon, 2004;

Cachon & Larivi

ere, 2005). One factor that may

explain the lack of systematic efforts by firms to rely

on well-designed incentives may be the lack of under-

standing of how buyers can use them to improve sup-

plier performance. There is a need for buyers to know

what types of incentives they should use and more

importantly under what conditions.

The goal of this study was to begin to bridge this

gap by examining the influence of incentives on sup-

plier performance under various conditions of buyer–

supplier dependence. We propose that incentives fall

into two main categories: competitive incentives and

cooperative incentives. Competitive incentives reward

suppliers based on how well they perform relative to

other suppliers, whereas cooperative incentives are

shared between the buyer and supplier based on their

joint performance (regardless of the performance of

other suppliers). We propose that the propensity of

firms to rely on either type of incentive is a good indi-

cator of the type of relationship adopted by the buyer.

For example, a buyer’s use of cooperative incentives

suggests that collaboration is occurring because the

sharing of rewards by the buyer can be seen as a

manifestation of the buyer’s managerial goals for the

relationship. In contrast, the use of competitive incen-

tives signals a more classic arm’s length approach

(Landeros & Monczka, 1989). Therefore, we anticipate

that the results of this study will inform the debate

about the relative benefits of collaboration versus

arm’s length sourcing and about the conditions under

which those strategies are most effective. We selected

buyer–supplier dependence as our main contextual

variable because it is a key characteristic of the buyer–

supplier relationship (Kraljic, 1983; Krause & Ellram,

2014) and a common input in purchasing portfolio

models (Bensaou, 1999, 1999; Cani€

els & Gelderman,

2007).

This study addresses the following two research

questions: (1) How effective are competitive incentives

and cooperative incentives under various power dependence

situations? (2) Can competitive and cooperative incentives

be used simultaneously to promote supplier performance?

We leverage social exchange theory (SET) to inform

our hypotheses. The supply chain management litera-

ture has emphasized some aspects of the SET primar-

ily pertaining to power dependence. However, it has

ignored the broader question that is the focus of this

study: Why two parties enter and maintain a relation-

ship in a competitive environment when multiple

alternatives are available?

The remainder of our study is organized as follows.

First, we review the research pertaining to the use of

incentives in supply chain management and introduce

the concept of cooperative and competitive incentives.

Second, we introduce our theoretical foundations and

elaborate our hypotheses. Next, we describe our meth-

odology for data collection and data analysis and

report our results. Lastly, we discuss the results and

implications for the field and provide directions for

future research.

LITERATURE BACKGROUND AND

HYPOTHESES

Incentives in Supply Chain Management

An incentive is defined as an external stimulus that

motivates future behavior (Berstein & Nash, 2008).

Although the use of incentives has been extensively

studied in the behavioral sciences, at the individual

level or in groups, the field of supply chain manage-

ment has mostly studied incentives through analytical

research, in the context of interorganizational

exchanges.

The study of incentives in analytical supply chain

research has mostly focused on the manufacturer–

retailer and buyer–supplier links. Cachon and col-

leagues established a research stream investigating

various cooperative and competitive inventory policies

as a way to incentivize the retailer and optimize sup-

ply chain performance. For instance, they and other

researchers analyzed the effect of buyback contracts,

revenue sharing contracts, quantity discounts, price

discounts, and advance-purchase discounts on supply

chain profit (Cachon, 2004; Cachon & Lariviere,

2001; Cachon & Larivi

ere, 2005; Netessine, Rudi &

Wang, 2006). These studies focused on how to incen-

tivize partners downstream in the supply chain.

In contrast, the goal of this study was to study the use

of incentives with partners upstream in the supply

chain and from the buyer’s standpoint. There is little

empirical research pertaining to how incentives can

effectively be used by buyers to elicit supplier perfor-

mance improvements.

Research relating to supplier development has been

the most specific at addressing the use of incentives in

supply chains. For instance, the list of supplier devel-

opment activities put forth by Krause, Scannell and

Calantone (2000) includes supplier incentives, com-

petitive pressure, and supplier assessment. In supplier

development, incentives tend to be market-based

incentives (e.g., increased sales volumes; repeat busi-

ness). Competitive pressure means buyers take advan-

tage of existing market competition between suppliers

to leverage their power and to indirectly motivate sup-

pliers. In this case, buyers allow the market to work

for them; market competition is an external force that

motivates suppliers to compete for the buyer’s busi-

ness, for example, through the use of competitive bid-

ding. Krause et al. (2000) reported that the use of

incentives such as promises of more business in the

present and consideration for future business, in

Volume 51, Number 4

Journal of Supply Chain Management

30