The Effects of the Economic Downturn on Interdependent Buyer–Supplier Relationships

• Published date: 01 September 2014
• Author: Daniel Krause,Lisa M. Ellram
• Date: 01 September 2014
• DOI: http://doi.org/10.1111/jbl.12053

The Effects of the Economic Downturn on Interdependent

Buyer–Supplier Relationships

Daniel Krause

1

and Lisa M. Ellram

2

1

Colorado State University

2

Miami University

The management of strategic buyer–supplier relationships is a critical concern for sourcing managers. The selection of key suppliers and

how relationships with these suppliers are managed and incentivized can dramatically affect the buying company’s performance. While the

extant literature focusing on industrial buyer–supplier relationships is significant, the severe economic downturn beginning in 2008 tested

buyer–supplier relationships in unprecedented ways, yielding new insights. The research presented in this paper uses dyadic cases to investigate

transformations within industrial relationships during the economic downturn. Propositions are formulated that focus on why and how firms

responded to the downturn. Three primary types of relationships are identified. The results indicate variation in the ways buying companies

managed their key supplier relationships during the downturn: some firms behaved more cooperatively and found ways to jointly confront the

effects of the downturn, while others responded by behaving competitively to maximize their individual outcomes. The results further suggest

that researchers need to revisit existing models of relationship development and dissolution to understand how these relationships evolve or

devolve. The research also raises questions about the value of physical and human asset specificity, and social investments in curtailing opportu-

nistic behavior in times of severe economic stress.

Keywords: buyer–supplier relationship; strategic sourcing; adaptation; interdependence; economic downturn

INTRODUCTION

The economic downturn that began during the fall of 2008 sig-

nificantly affected many companies’revenues, with some firms

reporting decreases in sales of 30% and more (Tracy 2011).

Many companies dramatically reduced purchases, cut inventories,

and laid off employees, while others temporarily closed or went

out of business. These dramatic effects of the downturn pre-

sented significant challenges for companies’supply chains and

provide the impetus for the present research: to investigate the

effects of the downturn on companies’relationships with their

most important suppliers, and to understand the contributions

these relationships make to buying firm performance.

During the past 20 years, researchers have increasingly

focused on cooperative buyer–supplier relationships as a source

of competitive advantage. Many companies moved away from

short-term contracting for important purchased inputs to rely on

key suppliers to achieve competitive advantage (Sako 1992; Choi

et al. 2002). Previous research has shown that decisions made by

sourcing managers in the selection and retention of suppliers,

manifest the purchasing function’s competitive priorities, and

reflect the competitive priorities of the firm itself (Krause et al.

2001). Thus, managing key buyer–supplier relationships and pro-

viding incentives to achieve specific goals is a critical aspect of

strategic sourcing, and an important way for sourcing depart-

ments to contribute to achieve a competitive advantage (Melnyk

et al. 2010).

Previous research indicates that firms can gain significant advan-

tage when they combine their resources with other firms in unique

ways (Dyer and Singh 1998; Gulati and Sytch 2007). However,

previous research also shows that customer–supplier relationships

can be fragile; affected by changing technologies, changing market

preferences, macroeconomic events and cycles, uncertainty and

risk, these relationships may dissolve. Although the extant litera-

ture has covered buyer–supplier relationships in significant detail,

one aspect that is predominantly missing is how these industrial

relationships fare under conditions of severe stress. For example,

Dwyer et al. (1987) provide a comprehensive model of the rela-

tionship development process and Wilson (1995) builds further

upon the previous effort, but these models are primarily focused on

relationship building, and not relationship dissolution or regres-

sion. The economic downturn of 2008–09 presented an opportu-

nity to study buyer–supplier relationships in times of severe stress,

when they might be subject to dissolution or regression.

The results of this study indicate significant changes in these

industrial relationships. Some relationships in this study emerged

stronger after the economic downturn. Others survived, but

emerged more adversarial. Buying firms that had cost as a com-

petitive priority prior to the downturn appear to have been better

prepared to handle the downturn than firms that changed compet-

itive priorities in response to the downturn, for example, from

innovation to cost. We seek to examine and explain the differing

effects of the downturn on these key relationships. The primary

questions driving the present research include: What were the

effects of the economic downturn on self-reported interdepen-

dent, collaborative industrial buyer–supplier relationships? As a

result of the downturn, did the two parties’interests become

more convergent or more conflicted? Did relational investments

such as physical and human asset specificity, and social invest-

ments prevent opportunistic behavior? What factors influence

interdependence in strategic sourcing relationships?

Corresponding author:

Daniel Krause, Professor, Operations and Supply Chain Manage-

ment, Department of Management, College of Business, Colorado

State University, 217 Rockwell Hall, Fort Collins, CO 80523, USA;

E-mail: dan.krause@business.colostate.edu

Journal of Business Logistics, 2014, 35(3): 191–212

© Council of Supply Chain Management Professionals

In the following sections, we examine the buyer–supplier liter-

ature, managers’perceptions of these relationships during the

downturn, and provide contributions to theory and practice.

THEORETICAL UNDERPINNINGS AND GAPS

Interdependence is a key foundational assumption throughout the

literature on strategic sourcing relationships (e.g., Gundlach and

Cadotte 1994; Monczka et al. 1998). Pfeffer and Salancik (1978)

identify interdependence as “the reason why nothing comes out

quite the way one wants it to”(p. 40) and note that “interdepen-

dence exists whenever one actor does not entirely control the

conditions necessary for the achievement”of a particular

outcome (p. 40). Mahapatra et al. (2010, 539) refer to interde-

pendence as “the condition that outcomes and strategies of a firm

are affected by the joint behaviors of both parties.”

Although much of the literature on key buyer–supplier relation-

ships refers to interdependence, few studies have identified the

dimensions of interdependence. For the present study, the authors

adopted the dimensions of interdependence proposed by Rusbult

and Van Lange (2003). Table 1 lists these dimensions and defini-

tions. Although Rusbult and Van Lange (2003) focused primarily

on interpersonal relationships, they asserted that interdependence

theory is applicable to intergroup behavior (Bantham et al. 2003).

The degree or level of dependence is characterized by how much

one party’s outcomes are defined by the other party’s actions. The

level of dependence is greater in industrial relationships if custom-

ers and suppliers are relatively few in number. Mutuality of depen-

dence means that each party has power over the other party, and in

turn is dependent on that party. Changes in the mutuality of depen-

dence may create new situations that allow the parties to behave

cooperatively or competitively (Dyer and Singh 1998). Outcome

correspondence, also referred to as the co-variation of interests,

describes whether the actions that benefit or harm one party also

benefit the other. That is, the degree to which an outcome similarly

benefits or harms both parties (Rusbult and Van Lange 2003).

Basis of dependence examines how each partner affects the other

partner’s outcomes (Rusbult and Van Lange 2003). The availabil-

ity of information applies not only to knowledge of a partner’s

actions, but also knowledge of the external environment. Knowl-

edge that accumulates as part of an ongoing relationship allows

partners to communicate efficiently and effectively (Dyer and

Singh 1998). In the present study, interdependency was a key qual-

ifying construct in asking buying company respondents to choose

a strategic supplier relationship on which to report.

Researchers have employed various theoretical lenses to investi-

gate buyer–supplier relationships. However, our purpose here is not

to exhaustively cover the literature, but to identify literature that

emerged during the present research as useful frames of reference.

For example, transaction cost economics (TCE) seeks to explain

firm boundaries and exchange governance through transaction cost

Table 1: Dimensions of interdependence

Definitions, prompts provided to interviewees, and sample responses

Theoretical

subconstructs

Aggregate

theoretical

constructs

Definition: How much one party’s outcomes are defined by the other party’s actions.

Interview prompt: “How replaceable is this customer/supplier?”

-“Moving business to another supplier, or gaining it from another customer, would be difficult,

especially in the short-term.”

- Customer says “no!”regarding dropping the supplier.

Level of

dependence

Inter-

dependence

Definition: The degree to which the partners depend on the other’s actions for their own outcomes.

Interview prompt: Describe “how party A thinks the party B views party A’s dependence.”

-“We are equally dependent. Both would suffer if relationship failed.”

-“This relationship would be difficult to duplicate with another party.”

-“When we need something, we ask for it, and they try to get it to us.”

Mutuality of

dependence

Definition: How each partner affects the other partner’s outcomes.

Interview prompt: Provide evidence of the uniqueness of customer/supplier.

- Supplier: “customer’s purchase volumes are significant.”

- Customer: “supplier has ability to outperform its competitors, e.g., through innovation.”

-“We use only one or two suppliers for this purchased input.”

-“This customer has a significant percentage of our business”... “very significant dollar volumes.”

-“We have a 3-year contract with them.”

Basis of

dependence

Definition: Whether the actions that benefit or harm one party also benefit the other. Ranges from

perfect correspondence to perfectly conflicting.

Interview prompt: Degree to which the parties’outcomes are equally valued by the respective

parties.

-“We must cooperate to survive right now.”

- Goals for relationship are “...pretty equal.”

Outcome

correspondence

Source:Definitions adapted from Rusbult and Van Lange (2003).

192 D. Krause and L. M. Ellram