Enhancing Supplier Development: An Efficiency Perspective

• Author: Hung‐Chung Su,Yi‐Su Chen,Ta‐Wei (Daniel) Kao
• Published date: 01 December 2018
• Date: 01 December 2018
• DOI: http://doi.org/10.1111/jbl.12197

Enhancing Supplier Development: An Efficiency Perspective

Hung-Chung Su, Yi-Su Chen, and Ta-Wei (Daniel) Kao

University of Michigan-Dearborn

This research identifies the factors that contribute to the buyer’sefficiency in utilizing supplier development practices for their supplier’s

performance. Prior studies support the notion that supplier development practices improve supplier performance; however, very few studies

focus on the factors that could improve a buyer’ssupplier development efficiency. Using a survey sample of 261 manufacturing plants from 11

countries, this study shows that relational norms and information sharing affect supplier development efficiency. Furthermore, information shar-

ing by suppliers is more effective than information sharing by buyers in terms of efficiency enhancement.

Keywords: stochastic frontier analysis; supplier development; information sharing; relational norms; alignment method; data envelopment

analysis

INTRODUCTION

Supplier development, a buyer-initiated effort, has been shown to

improve supplier performance effectively (Krause 1997; Hum-

phreys et al. 2004; Krause et al. 2007; Modi and Mabert 2007;

Li et al. 2012). However, the efficiency of supplier development

tends to vary. For example, a survey finds that the reported

reduction in order fulfillment cycle time due to supplier develop-

ment could vary from 30% to 80%.1 In addition, the reported

reduction in product defects varies even more significantly from

5% to 90%. This evidence, though anecdotal, suggests that some

buyers are more efficient at utilizing their supplier development

practices to develop their suppliers than others. That is, some

buyers are better at enhancing their supplier development effi-

ciency, which we define as the extent to which a buying firm

(i.e., buyer)2 utilizes its supplier development practices (the

input) to increase its supplier’s performance (the output). This

definition is consistent with the broader concept of efficiency,

which is generally defined as the extent to which inputs are

transformed into output (Green and Mayes 1991). Given that

buyers may differ in their efficiency of transforming their sup-

plier development into (improved) supplier performance, to iden-

tify interfirm differences in their supplier development efficiency,

we follow the same stochastic frontier approach adopted by

Lieberman and Dhawan (2005) in which they assess the impact

of resources on firm performance using the Battese and Coelli

(1995) model (cf. Lieberman and Dhawan 2005). While details

about this stochastic frontier approach are discussed later, mea-

suring efficiency with the stochastic frontier approach is superior

to the traditional output–input ratio approach. Stochastic frontier

explicitly considers firms’heterogeneity across production factors

(Chen et al. 2015) and is capable of estimating both efficiency

frontier and a firm’sefficiency using cross-sectional data (Lieber-

man and Dhawan 2005).

We deliberately differentiate between efficiency (doing things

right) and effectiveness (doing the right things) in this study.

Given that existing studies have documented abundant evidence

pertaining to the effectiveness of supplier development practices

on improving supplier performance, the premise of this study is

that supplier development is effective; that is, supplier develop-

ment is a right thing to do. Yet, existing studies have remained

silent on how to do the things (i.e., supplier development) right,

and factors that could potentially enhance a buyer’sefficiency of

utilizing supplier development practices are unexplored—a gap

this study aims to fill. More specifically, the findings of this

study shed lights on “how well the resources expended are uti-

lized”(Fugate et al. 2010, 45) such that buying firms not only

do the right thing (by investing in supplier development pro-

grams) but also do things right.

Consistent with the literature, supplier development represents

a specific asset a buyer invested in their suppliers (Krause 1997)

that the ending of a given relationship will render little value of

such an asset. Supplier development, as such, exposes a buyer to

transaction costs (i.e., transaction risk and coordination costs)

from a transaction cost economics (TCE) perspective. To

enhance supplier development efficiency, buyers can reduce the

transaction risk and coordination costs associated with their sup-

plier development. This study investigates three such factors:

relational norms, supplier information sharing, and buyer infor-

mation sharing. There are two considerations that we focus on:

relational norms, defined as a relationship between exchange

partners based on mutual trust, concerns, and shared values

(Heide and John 1992). First and theoretically, relational norms

is built with the intent of reducing transaction costs stemming

from asset specificity, that is, supplier development (buyer’s rela-

tionship-specific investment) in this study. Second and extending

from the first consideration, whether the reduced transaction

costs associated with relational norms offsets the increased trans-

action costs associated with asset specificity is, nevertheless, an

empirical question (Artz and Brush 2000). To the best of our

knowledge, the dialectical opposition between relational norms

and asset specificity (i.e., supplier development in this study) has

not been explored. Thus, by examining the effect of relational

Corresponding author:

Hung-Chung Su, College of Business, University of Michigan-Dear-

born, 19000 Hubbard Dr., Dearborn, MI 48126, USA; E-mail:

hcsu@umich.edu

1

https://scm.ncsu.edu/scm-articles/article/supplier-development-

strategies-and-outcomes

2

In this study, we use the term “buying firm”and “buyer”

interchangeably. Similarly, the term “supplier”in this study

refers to a supplying firm.

Journal of Business Logistics, 2018, 39(4): 248–266 doi: 10.1111/jbl.12197

© 2018 Council of Supply Chain Management Professionals

norms in a supplier development context, findings of this study

can provide managers with guidance about prioritizing resources

and make theoretical contributions to better understand transac-

tion costs empirically, one of TCE’s key concepts.

With respect to information sharing, TCE has been docu-

mented as one of the most prevalent theoretical lenses (Kembro

and N€

aslund 2014). Whereas buyer information sharing can

reduce transaction costs by reducing coordination costs associ-

ated with conflict resolution (Li et al. 2012) and/or misunder-

standing resulting from divergent viewpoints (Forker et al.

1999), supplier information sharing can reduce transaction costs

by reducing supply uncertainty (Li and Lin 2006) and by reduc-

ing a buyer’s coordination costs (Dyer 1997). In short, TCE

informs our choice of factors. In addition, our focus of these

three factors, particularly relational norms, furthers our under-

standing of TCE and its applicability in a supplier development

context.

Further, existing supplier development literature often exami-

nes information sharing as a single factor, specifically, informa-

tion shared by the buying firm (Humphreys et al. 2004; Krause

et al. 2007). This study extends the existing literature by consid-

ering information sharing from both the buyer’sand supplier’s

perspectives. In the existing literature, the role of a buyer is to

initiate supplier development and a supplier responds to such an

initiative (Krause et al. 2007). Specifying information sharing

into buyer versus supplier better captures the subtle yet crucial

differences between a strategic (proactive) act and a collaborative

(reactive) response. Second, differentiating between buyer and

supplier improves the understanding of information sharing both

conceptually and empirically. Conceptually, a closer look at the

existing supplier development literature indicates the concept of

information sharing is, in fact, buyer information sharing. For

example, “effective communication”is described as “open and

frequent communication between buying firm personnel and their

suppliers”(Humphreys et al. 2004, 134), or “buying firm respon-

dents were asked to specify the extent of their willingness to

share information with the supplier”(Krause et al. 2007, 536).

Empirically, differentiating information sharing into two separate

concepts can provide both the buyer and the supplier with more

specific guidance in a situation where the same act from two

sides may have different effects. In sum, differentiating informa-

tion sharing between buyer and supplier highlights another major

difference between this study and the existing supplier develop-

ment literature.

This study utilizes the stochastic frontier analysis (SFA) (Bat-

tese and Coelli 1995). SFA allows researchers to relax the

assumption that firms are technically efficient (always produce

the maximum amount of output with a given set of inputs) in

estimating a production function, an assumption that is necessary

using ordinary least squares regression (Greene 2008). In other

words, SFA allows us to model the actual (in)efficiency, as

opposed to assuming firms are fully efficient in their use of

inputs—an assumption that is rarely warranted in reality. Since

we assume that a firm’sefficiency regarding producing output

(e.g., supplier performance) using supplier development practices

as inputs vary and influenced by other factors, SFA is more

appropriate than traditional regression approach. Further, SFA

allows us to infer an objective measure of supplier development

efficiency (deviation from the efficiency frontier) rather than

directly assessing efficiency in a subjective manner (Chen et al.

2015).

Figure 1 shows the theoretical model examined in this study.

Using a sample of 261 manufacturing plants from 11 countries,

this study finds that relational norms and supplier information

sharing each improves supplier development efficiency. Contrast-

ing to expectation, we find that buyer information sharing could

degrade supplier development efficiency. Robustness analyses

using an alternative two-stage approach and data envelopment

analysis (DEA), an alternative frontier methodology, are consis-

tent with the main results. Discussions and future directions con-

clude this study.

LITERATURE REVIEW

Practices related to supplier development

The term supplier development was first used as early as 1966

(i.e., Leenders 1966) to refer to manufacturers’efforts to increase

viable suppliers and improve the subsequent supplier perfor-

mance. Such an effort was triggered by the “Buy Canadian”pol-

icy in the early 1960s, during a time when many Canadian

suppliers had poor quality. Poor supplier quality compounded

with the weak Canadian dollar (against the U.S. dollar) at that

time render “...the buyer’s responsibility...not to select, but to

create a satisfactory source”and as such, a “purchaser does not

select supplier development as an appropriate technique or tool;

it is the only course left, apart from in-plant manufacture”(Leen-

ders 1966, 54). Since then, supply chain management researchers

have discussed supplier development process (Hahn et al. 1990;

Hartley and Choi 1996; Krause et al. 1998), practices (Krause

et al. 1998; Reed and Walsh 2002; Wagner 2006), factors pre-

ceding buyer’s investment in supplier development programs

(Krause 1999), and results of supplier development programs

and from which identifying successful factors (Krause and Ell-

ram 1997a,b) and barriers (Lascelles and Dale 1989). Strategic-

oriented supplier development involves those practices in which

a buying firm takes an active role and dedicates physical and

human resources directly to a specific supplier with the goal of

increasing supplier performance to better meet the buying firm’s

needs. Exemplary practices include, but not limited to, providing

Supplier

development

efficiency

Relational

norms

Supplier information

sharing

Buyer information

sharing

H2

H4b

H4a

H1

H3

Figure 1: Theoretical model.

Enhancing Supplier Development 249