IMPJournal2i2

THE IMP JOURNAL

ISSN 0809-7259,

VOLUME 2

CONTENTS

ISSUE 2.2

Page 3-24 Wendy van der Valk, Finn Wynstra and Björn Axelsson

An Empirical Investigation of Interaction Processes between Buyers and Sellers of Business Services

Page 25-37 Roberta Bocconcelli and Håkan Håkansson External interaction as a means of making changes in a company: The role of purchasing in a major turnaround for Ducati

Page 38-58 Ann-Charlott Pedersen, Tim Torvatn and Elsebeth Holmen

Towards a Model for analysing Supplier Relationships when developing a Supply Network

Produced in cooperation with Norwegian School of Management BI

The IMP Journal Volume 2, number 2 1

A Letter From The Guest Editor, Hakan Hakansson

Introduction To Special Issue In Purchasing

Purchasing has always been an important field of research within IMP. One reason for this importance was stated clearly in the first IMP book, Industrial Marketing and Purchasing: An Interaction Approach, published in 1982. In this book we challenged the view that purchasing was different from marketing. Another more practical reason for its importance in IMP work is that companies are generally more open to discuss and document how they work with suppliers compared to how they treat their customers. But independent of these reasons, our studies of purchasing has forced us into an interesting theoretical question: What is “purchasing”? This is a simple but at the same time a very essential question. We probably all have the same picture when presented with this question: In order to make a good purchase we need to have some alternatives. Purchasing is about selecting! But in contrast, if we pose a similar question about selling then the answer is not all about selecting. Selling is about convincing! I would argue that the focus on selection is one of the major problems that those who seek to develop purchasing in companies struggle with. This problem is illustrated in the second article of this special issue about purchasing. But, the same basic theme can also be found in the other two articles. All three articles are to a very limited extent dealing with choice between alternatives. Instead the focus in each is on the interaction that takes place between the customer and supplier companies. The main issue in each of the papers concerns how the two sides can develop an interaction that solves the problems that both companies face and at the same time is efficient. In the first article by van der Valk et al the interaction concerns business services purchased by an oil company based in the Netherlands. The authors use this case study to investigate four interaction processes between this customer and four suppliers covering three types of business services. One of these is a semi-manufactured service – a drilling service. Two of these concern instrumental services – one is an engineering/construction service and the other involves the management of a stock of piping materials. The final process relates to a consumption service in terms of waste management. The authors find that the interaction processes in these cases are different from each other in a systematic and predictable way. The authors’ conclusion is that the ongoing interaction is a vital part of the selling and buying of business services and that the process will be closely related to structural aspects such as key objectives, functional representatives and organizational capabilities. Interaction becomes an even more accentuated aspect in the second contribution by Bocconcelli & Håkansson. This paper is based on a case study of the motorbike producer Ducati. The authors concentrate on the important interplay between internal organizational attributes and external interaction. In the case study, Ducati has financial problems and needs to improve both efficiency and effectiveness and to change its supplier relationships. As more than 80% of the value of Ducati’s final product is produced by suppliers, its suppliers have to be involved in the change process in order to achieve a turnaround in the company’s fortunes. The interaction between Ducati and its suppliers has to be intensified in order to find better solutions from the perspective of efficiency and innovation. One internal change was to create purchasing teams with a much broader competence, but also to


change the name of the responsible unit from “purchasing” to “supplier development”. These actions were done both to signal a new way to behave both internally and toward the suppliers but also to try to convince the latter to develop their own way of functioning in order to facilitate interaction. The case is an interesting example of how much there is to be done in terms of increasing the capability to interact in order to develop much more efficient production and logistic structures. In the third article by Pedersen et al both the customer and supplier sides of relationships are treated in a truly interactive way. Both sides are described in terms of how the focal interaction is part of a larger pattern of interactions. The two parties and their contexts are matched in order to identify four situations of more or less balanced character and to show the consequences of these for the interaction process. The model developed in the paper builds on earlier research into purchasing portfolio models and supply networks. The model is applied to a longitudinal study of a construction company and its main suppliers. The empirical illustrations centre on company learning, capacity issues and cost handling. The three articles together provide an interesting picture of what can be achieved by taking an interaction approach to purchasing. But they also show that there is a lot more for us to learn about these issues. Best Wishes Hakan Hakansson


An Empirical Investigation of Interaction Processes between Buyers and Sellers of Business Services

Wendy van der Valk a*, Finn Wynstra b and Björn Axelsson c

a Eindhoven University of Technology, PO Box 513, 5600 MB Eindhoven, the Netherlands, [email protected].

bErasmus Research Institute of Management/ RSM Erasmus University, PO Box 1738, 3000 DR Rotterdam, the Netherlands,

[email protected]. c Stockholm School of Economics, PO Box 6501 – S 11383 Stockholm, Sweden, [email protected].

*: Corresponding author

Acknowledgements: The authors wish to acknowledge the useful comments of Wilfred Dolfsma, Ferdinand Jaspers and Thomas Ritter, and the anonymous reviewers of the journal.

Abstract

This paper presents the results of a theory-building study into processes of interaction between buyers and sellers of different types of business services. We build on a recently developed usage-based classification of business services which identifies four service types. Earlier studies indicated that interaction for different types of services is associated with different key objectives, and differing functional involvement and organizational capabilities. However, the interactive processes that take place between buyers and sellers were not included in these studies.

The main objective of this article is to make a theoretical and an empirical contribution by 1) extending the conceptualization of interaction by including process dimensions; and 2) empirically investigating what these interactive processes look like for each of the four types of services. This empirical investigation is done by means of an embedded case study.

The results of our case study suggest that different types of services are associated with differing processes of interaction. Furthermore, we were able to replicate previous findings regarding the key objectives, functional involvement and organizational capabilities. Additionally, we found that the level of perceived risk associated with a service influences the extent to which interfaces and interaction processes are formally defined and designed.

Keywords: Business Services, Interaction, Purchasing, Buyer-Seller Relationships

Introduction

The services marketing discipline

(Grönroos 2000; Lovelock 1983; 2001; Zeithaml & Bitner 1996) has consistently been emphasizing that (consumer) services are produced in interactive processes between the seller and the buyer. Zeithaml, Berry and Parasuraman (1988, p. 35) claim that “in most services, quality occurs during service delivery, usually in an interaction between the customer and contact personnel of the service firm”. As such, one could argue that the success of a service is actually established in the encounter between service provider and buyer. These observations equally apply to business

services, and highlight the presence of ongoing buyer-seller interaction, or in other words: continuous interaction during the service delivery process.

Recently, Grönroos (2004) stressed the importance of the service encounter and the customer-service provider interactions it comprises. This parallels a shift in the strategy debate towards a micro perspective on strategy and strategizing (Johnson et al. 2003), thereby calling for emphasis on the processes and practices that make up the daily activities of organizations and that relate to strategic outcomes. Johnson et al. (2003) argue that as the transparency of resource markets increases, sustainable advantage remains more and


more in the level of detail of the buyer-seller relationship. Hence, daily activities and ongoing interaction are the ‘stage’ for strategic behaviour.

Consequently, studies into buying business services could benefit from focusing more on the ongoing business (as opposed to the ‘transactional’ purchasing process), where the design and management of interfaces and interaction processes are an important determinant of the actual outcomes of the customer-supplier relationship. Unfortunately however, researchers in the area of Purchasing and Supply Management (PSM) have not fully acknowledged this typical aspect of services, and have largely focused on the initial phases of the purchasing process, such as supplier selection (Day & Barksdale 1994). An exception is Mitchell (1994), who briefly touches upon problems and risks in the buying process for consultancy services and includes project management and performance evaluation in addition to the stages comprising the up-front decision-making process.

In order to investigate this notion of ongoing interaction from a PSM perspective, Wynstra, Axelsson and Van der Valk (2006) recently proposed a classification of business services based on how the service is used/ applied by the buying company. They furthermore identified several dimensions in terms of which patterns of interaction can be described and found variation on these dimensions in their exploratory studies. However, as acknowledged by Wynstra et al. (2006), this conceptualization of interaction is rather static, since it involves only structural dimensions. Furthermore, in their exploratory studies, these authors did not explicitly address sampling issues or the development of research instruments.

The purpose of this paper is two-fold. Firstly, it extends the conceptual framework provided by Wynstra et al. (2006) by adding process dimensions to the set of dimensions originally used to describe patterns of interaction. According to Whetten (1989), identifying how a proposed change in the number of variables affects accepted relationships between the variables is a good way to

demonstrate the value of this change. Secondly, we empirically investigate ongoing interaction by conducting a single, theory-building case study aimed at understanding what processes of interaction look like for each of the four types of business services. This case study draws on theoretical selection criteria (Dul and Hak, 2007), as well as on a case protocol and an interview guide, thereby preventing the limitations that characterized the dataset of Wynstra et al. (2006). Conclusions are drawn and suggestions for future research are developed.

Usage as a driver for variation in ongoing interaction

Most firms nowadays tend to engage in a limited number of long-lasting relationships. As a result, the ongoing interaction in these business relationships has become highly important. The Industrial Marketing and Purchasing (IMP) Group was one of the first scholarly groups to acknowledge the importance of the ongoing business relationship and the interactions involved (Ford 2002; Håkansson 1982). In ongoing business relationships, buying companies and suppliers interact during exchange episodes and as part of the long-term relationship (across exchange episodes). Effective of functional interaction between buyers and sellers is required to ensure the successful ongoing exchange of business services.

In order to determine what a functional pattern of interaction looks like, the IMP Group has extensively investigated ongoing interaction between buyers and sellers of industrial goods. They identified variation in interaction and found that the type of application of a purchased good is the main determinant of buyer-supplier interaction (Håkansson 1982). Based on this attribute, Håkansson (1982) distinguishes three classes of goods: capital equipment, raw and processed materials and components (note that services are not explicitly accounted for in this classification). The classification resembles the classification


of industrial goods brought forward by Robinson et al. (1967), who make a distinction between product constituent transformers (components), product constituents (semi-manufactures), production facilities (investments goods/ instrumental services) and production services (MRO goods/ consumption services). Similarly, Jackson and Cooper (1988) identify three classes containing both products and services: 1) capital products (major equipment); 2) operation products (minor equipment and MRO services); and 3) output products (raw materials/ components and ‘production services’ purchased for the final product)1.

Building on the classifications of Håkansson (1982) and Jackson and Cooper (1988), Wynstra et al. (2006) propose a classification of business services, based on how the service is used/ applied by the buying company, and claim that this usage dimension is one of the main factors affecting the appropriate (effective) design of customer-supplier interfaces and interactions. Four types of services can be identified: component services, semi-manufactured services, instrumental services, and consumption services.

Component services are, without transformation by the buying company, passed on to the end-customer. Examples are subcontractors for a cleaning company, or (inbound) call centre services for a telecom company. Semi-manufactured services are transformed by the buying company before being passed on to the final customer; these services are primarily used as an input by the buying organization for particular offerings to final customers. An example is outsourced market research, which is then used by a marketing and advertising company to develop a marketing plan for a client. Instrumental services directly affect how the buying company’s primary2

1 MRO services are purchased by an organization to run

its operations (f.e. maintenance, but also legal services) while production services become part of the production process for a particular (set of) product(s) (Jackson, Neidell and Lunsford, 1995). 2 By primary processes we mean those processes aimed

at fulfilling customers needs and wants (value-creating processes). Secondary processes refer to those processes

processes are carried out (they are not delivered to end-customers). An example is subcontracted ICT services to support the operations of a logistics service provider. Finally, consumption services do not directly affect how the buying company’s primary processes are carried out. An example is the cleaning of office buildings for a consultancy agency.

This classification has several important benefits. Firstly, it focuses specifically on business services, which according to Boyt and Harvey (1997) and Jackson and Cooper (1988) have received far less attention than consumer services. Secondly, it takes into account services that are being passed on to (business) customers: these services have largely remained unaddressed in services marketing research (Jackson & Cooper 1988). Thirdly, it takes on a buying firm’s rather than a service provider’s perspective. Finally, it enables the identification of similarities between services that are technically speaking of a different nature. Whereas business services are usually classified with regard to the nature of the service (IT, HRM), the service providers or the stakeholders involved (Agndal et al. 2006), this classification draws attention to the importance of an individual service for the buying firm, for example for customer satisfaction or for the continuity of the buying company’s primary processes. Similarly, Fitzsimmons et al. (1998) argue that it is important to identify who or what is the recipient of the service (people, things or processes), since this provides an understanding of the nature of the service being offered and the required interactions. Focusing on what they can/should do with the service and its provider rather than on the service itself enables buying companies to think about what functional aspects are crucial and consequently who should be involved to what extent in the purchasing decision process and the exchange process that follows thereafter. These issues are

that enable and support the primary activities (Porter, 1985).


expected to be equally relevant for business service providers. Developing the concept of interaction: adding process variables

Exploratory case studies into

service procurement indicate that differences exist with regard to the key objectives of interaction, type of representatives involved and required buyer and supplier capabilities (Table 1) (Wynstra et al. 2006). For example: the key objective for component services is to have the service fit with the buying company’s existing offerings, whereas for instrumental services, the service should result in the desired effect on/ change in the primary processes. These key objectives have certain implications for the resources required from buyer and seller (Cunningham & Homse 1986).

On the one hand, the key objective of interaction is reflected in the type of functional representatives involved in the ongoing interactions. For component services, for which the end-customer plays an important role, this involvement comes from people representing the end customer (often the marketing function) or perhaps even the end customers themselves. The fact that instrumental services affect the buying company’s primary processes results in the involvement of business development and primary process representatives. Other internal users often include general management and service specialists (e.g. internal lawyers in the case of legal services).

On the other hand, different key objectives will require differing capabilities from both the buying and the supplying organization. When providing component services, the supplier has to understand the service itself as well as how it fits with the buying firm’s complete (downstream) offering. Furthermore, an important capability is to match internal capacity with the buying company’s demand pattern. Critical customer capabilities include the ability to (timely) interpret, translate and communicate (changes in) final customer demands and the ability to synchronize

and coordinate the design (‘architectural knowledge’) and delivery (‘assembly capacity’) of the different services. For instrumental services, the supplier should have a thorough understanding of the buying firm’s production process. Furthermore, since instrumental services often have a long-term character, the supplier has to be able to sustain and support the service for an extended period of time (Håkansson 1982, p. 163-192). Critical customer capabilities concern the ability to interpret, translate and communicate the demands of internal users and the capability to (help) implement and leverage these services within the own organization.

Although Wynstra et al. (2006) acknowledge the limits of their conceptualization of interaction in terms of objectives, capabilities and interfaces and point out that the concept of interaction can be further developed by including process-related dimensions, they do not address this in large detail. This seems inconsistent since the IMP Group has repeatedly stressed the importance of studying the interactive processes between buyers and sellers and identified two key interaction processes: institutionalization and adaptation.

Institutionalization

Institutionalization occurs when buyer-seller relationships are long-term: in these relationships, conscious decision-making may be substituted by routine behaviour (Håkansson 1982). As such, patterns of interaction will either be deliberately designed or, more often, emergent. Institutionalization may for example emerge in the inter-organizational contact patterns as well as the role relationships being built up over time. Therefore, we propose to primarily focus on ongoing communication as an area in which institutionalization takes place, since this is expected to be strongly coherent with the structural dimensions of interaction, i.e. key objectives and functional representatives involved. Thus, we focus on the results of institutionalization, not on the process of institutionalization itself.

The differences in terms of key objectives, functional representation, and


Table 1 Differences in objectives, capabilities and interfaces for the different service types

Type of service Objectives Critical supplier capabilities Critical customer capabilities Supplier representatives

Customer representatives

Component services � The service should fit with the customer’s final offering

� Production capacity and quality

� Development capabilities (in case of specialized services )

� Translating/communicating final customer demands (on ongoing basis)

� Synchronizing the supply of various service components

� Marketing representatives regarding the supplier’s own service

� ‘Downstream’ specialists (knowledgeable of the customer’s final offering)

� Buyer specialists regarding the service bought, and marketing representatives knowing the needs of the buyer’s customer

Semi-manufactured services

� The buying company should be able to transform the service in the desired way

� Production capacity and capability to maintain a stable quality

� Innovative capabilities (when used as an external expert and for strategic services)

� Translating final customer demands

� Optimizing fit between internal and supplier’s operations

� Synchronizing suitable contact interfaces between internal and the supplier’s operations

� ‘Production planning’ and marketing representatives

� Production and quality representatives

Instrumental services

� The service should affect the customer’s primary processes in the desired way

� The service should fit with important characteristics of these primary processes

� Business development and innovation

� Business and service production design services

� ‘Implementation’ skills: understanding what fits when, how and for whom

� Product representatives, often including a team of consultants or process engineers

� Business development representatives and affected internal customers

Consumption services

� The service should support various core processes

� Ability to supply the desired service and (if needed) adapt it to the specific situation of customer

� Translating/communicating internal customer demands (on ongoing basis)

� Follow up on performance and user satisfaction

� Marketing representatives

� Buyers and internal customers


organizational capabilities will obviously be reflected in these inter-organizational contact patterns between the buying company and the service provider. Indeed, Wynstra et al. (2006) found that patterns of communication for the different service types differed in terms of broadness and the high-priority issues addressed. Håkansson (1982) suggests that the frequency and form of communication in relation to the topic discussed and the individual that was contacted are important dimensions when trying to understand the information exchange between buyer and seller, both within and across exchange episodes. Similarly, Cunningham and Homse (1986) mention frequency, intensity and hierarchical and functional scope of customer-supplier contacts as short-term aspects of the interaction process. Building on Cunningham and Homse (1986) and Wynstra et al. (2006), we propose to analyze the contact patterns in terms of hierarchical and functional scope, since this is expected to fit well with our analysis of the buyer-seller interface. These dimensions are evaluated by investigating what issues in the buyer-seller dialogue are important, since this should reflect the relevant hierarchical and functional issues.

With regard to these process dimensions, several propositions can be developed. For example: for component services, which become part of the offerings to final customers, critical issues in the buyer-seller dialogue are the integration of the service into the overall offering of the buying company, end-customer requirements (f.e. regarding the sourcing of the component or the desired use of the component) and the coordination of service production/ delivery and consumption. In contrast, for instrumental services, a critical issue in the buyer-seller dialogue is how and to what extent the service impacts the buying company’s primary processes. Buyer and seller will furthermore discuss developments in the supply market and within the buying organization, as to obtain long-term alignment. The complete set of propositions regarding buyer-seller communication of interaction is as follows:

Proposition 1 In the buyer-seller communication for a … component services, the most

important issues are customer requirements, the fit of the service with the rest of the offering, and the customers’ evaluation of the service.

b … semi-manufactured services, the most important issues are customer requirements, service transformation possibilities and the fit between the customer’s and the supplier’s processes.

c … instrumental services, the most important issues are the buying company’s strategy and developments, and the effect of the service on the buying company’s primary processes.

d … consumption services, the most important issues are internal customer demands, the internal customer’s evaluation of the service and how to increase efficiency (f.e. by reducing administrative workload).

Adaptation

Adaptations refer to any relation-specific changes or investments made by the parties involved aimed at facilitating buyer-seller collaboration. Brennan et al. (2003) brought forward several areas in which adaptation can take place when exchanging industrial services (derived from Håkansson (1982) and adapted to the specific situation of services by Brennan et al. (2003)): service specification, service design, service delivery processes, capacity and demand management, administrative procedures, financial procedures, adaptations with regard to provision of sensitive information, and changes to organization structure. They furthermore pointed out that adaptations can be unilateral (one firm making a modification for a specific exchange partner, without the exchange partner making a reciprocal modification) or mutual (reciprocal modifications).

Since demand for component services is strongly related to the purchase pattern of the buying companies’


customers, adaptations are made with regard to capacity and demand management. With instrumental services, sensitive information regarding for example the buying company’s strategy is provided to the service supplier, in order to enable the supplier to optimally address the developments within the buying organization. Because of the long-term collaboration between buying company and service provider, special arrangements are also made with regard to financial and administrative procedures. We thus develop the following propositions: Proposition 2 Adaptations for… a … component services mostly

occur with regard to the specification and design of the service, and capacity and demand management. Furthermore, critical information regarding the buying company’s value proposition will be exchanged.

b … semi-manufactured services mostly occur with regard to service delivery and capacity and demand management. Furthermore, critical information regarding the buying company’s value proposition will be exchanged.

c … instrumental services mostly occur with regard to organizational structure. Furthermore, critical information regarding internal developments at the buying company will be exchanged.

d … consumption services mostly occur with regard to financial and administrative procedures.

The perceived risk framework and its consequences for buyer-seller

interaction In addition to variation with regard

to structural dimensions of interaction, Wynstra et al. (2006) found that patterns for interaction were more explicitly defined and designed for some of the services they studied. For example: a “qualified” dialogue between the companies involved could be observed for the strategic and knowledge intensive component service,

whereas for the non-strategic component services, broader patterns of interacting people were found. Also, the variety and number of involved specialists differed for an advanced semi-manufactured service versus one that is standard. Based on these findings, they suggest that patterns of interaction surface most clearly for those services that are associated with a high degree of perceived risk, or high potential impact. We therefore deem it important to control for risk in our analysis, since this may explain deviations from the expected patterns of interaction, should they occur.

This suggests that the buying companies studied designed the interaction with the supplier with reference to other factors than how the service is used/ applied by the buying company. From their review of the three most influential models of Organizational Buying Behavior (OBB) (Robinson & Faris 1967; Sheth 1973; Webster & Wind 1972), Johnston and Lewin (1996) conclude that much of the variation in OBB can be related to the level of perceived risk associated with a particular purchase situation. Building on Bauer (1960), Mitchell and Greatorex (1993) and Sheth (1973) claim that perceived risk is a combination of consequences (measured in terms of seriousness/ importance) and uncertainty. Indeed usually, perceived risk is viewed as the function of two variables: the importance of the purchase and the level of uncertainty associated with the outcome of the purchase (Gelderman & Van Weele 2002; Henthorne et al. 1993; Kraljic 1983; Wilson et al. 1991).

Importance refers to the purchase’s impact on organizational profitability and productivity (McQuiston, 1989). Importance/ seriousness can thus be interpreted as the extent to which a service is strategic or critical for customer satisfaction: in the case of component and semi-manufactured services, service delivery failure has a direct impact on end customers. The service can also be of critical importance for the continuation of the buying company’s production processes or result in a short-term or long-term impact on for example the primary processes of the buying company: this


mostly applies to instrumental services. Consumption services will generally be considered unimportant for the buying company’s profitability, competitive advantage, or for the continuity of the buying company’s primary processes3.

Uncertainty is a concept that is usually made up of complexity and novelty. Considering complexity, two elements can be identified (McQuiston 1989): complexity of the purchase situation and complexity of the product (service) being purchased. Since we are interested in the potential influence of complexity (as an element of risk) on ongoing interaction, we focus on the complexity of the service. This complexity depends on the inherent complexity of the service (i.e. the extent to which a service is advanced) and the inherent complexity of the context in which the service is applied (Fisher 1976, p. 30)4. Similarly, novelty refers to the extent to which buyers are familiar with similar services or similar contexts in which the service is to be applied (Fisher 1976, p. 30).

The importance of these factors is also noted by Fitzsimmons, Noh and Thies (1998), who point out that the importance or criticality of the service to the buying firm must be considered in the purchasing decision, and by Smeltzer and Ogden (2002), who find that the nature of the services being purchased and their associated complexity are major factors for purchasers.

Regarding the influence of perceived risk on interaction, Johnston and Bonoma (1981) and later McQuiston (1989) demonstrate that the functions/ people involved in interactions with suppliers vary with the novelty, complexity and importance of a purchase. Johnston and Bonoma (1981) define five

3 Note that a consumption service like office cleaning can

be considered highly important when regarding them from the perspective of the internal customers/ users of the building. 4 Fisher (1976, p. 30) furthermore proposes the level of

experience the buying company has with the technological characteristics of the service and the level of sophistication of the buying firm in this specific area. In our view, this resembles McQuiston’s (1989) definition of novelty; this latter factor therefore determines uncertainty rather than complexity.

measurable dimensions of the buying centre and find that novelty, complexity and especially importance were very helpful in explaining the level of managerial involvement, the functional disciplines involved, the number of people involved and the degree of linkage between members of the buying centre. McQuiston (1989) expands on the theory of buy classes (Robinson & Faris 1967) by studying the combined effects of novelty, complexity and importance and finds that particularly the last two constructs explain participation and influence of different organizational functions.

Johnston and Bonoma (1981) furthermore claim that the influence of novelty, complexity and importance is likely to be present in and have an effect on both the purchase situation and the interactions afterwards. Within the OBB research tradition however, these interactions have not been studied in great detail. For example: the influence of risk on ongoing interaction may be reflected in a higher level of managerial involvement. Therefore, in line with the claim of Johnston and Bonoma (1981) and the findings of Wynstra et al. (2006), we propose that differentiated patterns of interaction are more formally defined and designed for services that are characterized by high perceived risk, since buying companies will make more conscious decisions about how to deal with these services. These ideas lead to the development of the following propositions: P3a For high-risk services, the extent to

which the patterns of interaction for the four service types are really distinct is high. Since consumption services are

generally characterised by low risk, we also bring forward the following proposition: P3b Interaction patterns for low risk-

services are similar across all service types and resemble the interaction pattern for consumption services.


A case study into ongoing buyer-seller interaction

The propositions developed will now be investigated by means of an embedded case study. In this case study, i.e. the study of one service of each service type at one buying company, we investigate what the processes of interaction look like for each of the four types of services. We thus study four cases (service purchases) at one buying company. Furthermore, collecting evidence on the structural dimensions of interaction enables us to replicate the findings of Wynstra et al. (2006). After all, in their studies, Wynstra et al. (2006) did not explicitly address case selection issues or the development of research instruments. In our case study, we draw on a pre-determined case protocol and interview guide5.

The case study is part of an overall research project, in which we intend to study one service of each type at several companies (thus: multiple case studies). Such an approach enables both within-company and cross-company comparisons, the results of which are used to develop the emergent theory. We developed theoretical selection criteria using the following two dimensions: 1) the type of company (service providers versus manufacturing companies); and 2) the type of customer of the buying company (other companies or consumers). We invited multiple companies in each of the resulting categories; eventually, ten companies agreed to participate in our study. We expected results obtained at different companies would be similar when these companies are similar in terms of the selection criteria used (within-categories); across-categories, results are expected to differ.

From these ten companies, a Fossil Fuels (oil and natural gas) Exploration and Exploitation company (FFEE) was selected for this case study; the reason for choosing this company was that it was the

5 Since in this case study we were to use our case protocol

and interview guide for the first time, this study would also be used to evaluate the suitability and usability of our research instruments and case protocol.

first company at which data could be collected.

FFEE finds and produces oil and natural gas in the Netherlands and the Dutch part of the continental plate. It is the largest natural gas producer in the Netherlands, with annual production of around 50 billion m³, which covers around 75% of Dutch demand. With an oil production of 0.8 million m³ a year, FFEE covers about 4% of the country's total oil demand. FFEE also performs various construction projects with differing sizes, ranging from relatively small modifications to the realization of complete land or offshore installations for the extraction of oil and/ or natural gas.

In consultation with the authors, FFEE selected the four services (one service purchase for each category in the usage-based classification) to be studied. Unfortunately, we were not able to identify a component service. This can be explained from the fact that at manufacturing companies, it will usually be more difficult to identify services that move downstream to customers: instrumental and consumption services will be more common. We therefore proposed to select four services from the remaining three categories. This resulted in one semi-manufactured service, two instrumental services and one consumption service.

In our analysis, we control for the level of perceived risk involved with each service to see if this helps us to understand why interaction may not vary as strongly as expected. The risk associated with the semi-manufactured service and one of the instrumental services was considered high; the risk associated with the other two services was low. Thus, specifically within the category of instrumental services, interesting insights may be obtained. The level of risk associated with the service purchases reflects the level of risk as perceived by the buying company. The services selected and their brief descriptions, their respective classifications, and the functions of the people interviewed can be found in Table 2.

Each of the purchases was studied by means of two to three in-depth interviews of 1,5 to 2 hours each with


Table 2 Services and informants (SEM: semi-manufactured, INS: instrumental, CNS: consumption) Service Informants Type

purchasers and with contract owners and/or users. The interviews with the purchasers focused predominantly on the purchasing process and to a lesser extent on the ongoing stages, whereas for the contract owners, who were deemed to be most knowledgeable on what happened after the purchase, the emphasis was on these ongoing stages (data source triangulation; Yin (2003)). Appendix I contains the interview guide used. In most cases, the buyer involved was approached first. Other informants were usually identified by the buyer. We tried to take the supplier’s perspective into account by asking the buying company about supplier representatives involved, the supplier's actions/ behaviours, viewpoints, et cetera; however, data was not collected at the suppliers.

The interviews were semi-structured. The interview guide was based on the interview guides used in similar studies conducted by the IMP Group (Håkansson 1982). Of each interview, extensive interview summaries were made and sent back to the informants for verification. Approved summaries at the informant level were merged into one description at the case level, which was again sent to the informants in order to eliminate any inconsistencies and to provide further clarification if necessary. Furthermore, the interview results were extensively discussed by the authors to further enhance validity6. Table 3

6 The research team consisted of one principal researcher

and the two co-authors of this paper.

summarizes how we dealt with various issues of validity and reliability.

Results of the case studies

We now turn to descriptions of the

four cases studied, after which we will perform a within-case analysis and a cross-case analysis across the three service types. The findings for all cases studied have been summarized in Table 4; we will refer to this table in our analysis.

A semi-manufactured service: drilling services

FFEE works with a main contractor, which provides the equipment/ installations and the personnel to perform the actual drilling for oil, and which is paid a refund for its costs plus a fair profit margin. The main contractor also manages the contracts with third parties (which can only be contracted in consultation with FFEE) and carries out some project planning activities. This service becomes part of the customer processes (increased speed of production due to the use of a special drilling technique); furthermore, demand for the service is strongly connected to customer demand. It is therefore considered a semi-manufactured service. The service comprises a high risk purchase, since non-performance of the contractor results in substantial production (and thus revenue) loss.

For this service, the key objective of interaction is to integrate the drilling service into FFEE’s primary processes. Consequently, the supplier needs to

FF

EE

Drilling services � Supply Chain Engineer (purchasing) � Drilling Development Team Leader

SEM

Engineering and construction services

� Supply Chain Engineer � Senior Project Engineer

INS HIGH RISK

Managing stock of piping materials

� Supply Chain Engineer � Mechanical Engineer Piping

INS LOW RISK

Waste management � Supply Chain Engineer � Representative Waste Management

department CNS


Table 3 Validity and reliability in the case studies Type of validity Methods of addressing this in the case studies

Construct validity “establishment of correct operational measures for the concepts being studied”

� Triangulation of questionnaire and interview data � Triangulation of multiple informants: different internal

representatives � All informants received draft versions of the interview

report for comments � Draft versions of the complete case report were verified

with at least one key informant from each buying firm � Three research team members gave input during data

collection and analysis � Result: emergent explanations adjusted and expanded;

participants agreed to the interpretations Internal validity “establishing causal relationships whereby certain conditions are shown to lead to other conditions, as distinguished from spurious relationships”

� Use of conceptual framework � Result: relationships between the different variables

from the conceptual framework identified and substantiated

External validity “establishing a domain in which the study’s findings can be generalized”

� Theoretical sampling of cases at the firm level and the level of the service purchase

� Result: revised framework applicable to different types of firms and service purchases

Reliability “demonstrating that the operations of a study can be repeated with the same results”

� Development of case protocol � Development of (interview) questionnaire � Result: methodology transparent and repeatable

Based on: Yin (2003). understand not only its own service delivery process, but also FFEE’s primary processes. The fact that this contract involves a new drilling technique puts certain requirements on the innovative capabilities of the supplier (further development and fine-tuning of the technique). The supplier needs to understand the safety requirements of FFEE, as well as the impact of non-production on FFEE’s revenues. FFEE has to be able to properly explain these issues. Furthermore, FFEE should provide a good forecast on when a drilling period will start, as well as maintain the time schedule (coordination of FFEE’s and the supplier’s processes). We find the involvement of production planners; however, marketing involvement is lacking. This can be explained from the fact that production is delivered to a company which is part of the same

conglomerate as FFEE. Formally, this customer company is considered an external customer. However, being part of the conglomerate, production planners also fulfil the marketing role. Regarding the supplier representatives, an account and a contract manager represent the commercial side of the supplier. Technical specialists are involved to plan, prepare and perform drilling activities. Communication is intensive and concerns production progress and deviations that may occur. Adaptations mostly occur with regard to the specification and design of the service: the supplier has developed the new technique in collaboration with (and thus custom for) FFEE.

FFEE is satisfied with the contractor’s performance in terms of the service provided and the process of service provision. The service is delivered at the right time with the right quality and


Table 4 Findings for the different types of services at FFEE Objectives Critical supplier

capabilities Critical customer capabilities

Supplier representatives

Customer representatives

Communication Adaptation

FF

EE

_S

EM

Deliver a service that enables production during drilling

� Understand how service contributes to revenue generation FFEE

� Understand importance of safety aspects

� Innovativeness

� Provide accurate forecast of demand

� Maintain time schedule (delay in production means revenue loss)

� Account manager � Contract

manager � Administration

department (for support purposes)

� Technical specialists (regarding ongoing delivery)

� Supply chain engineer (purchasing)

� Technical representatives

� Contracting

� Production progress, deviations

� Daily operational contact, quarterly review meetings

� Evaluation on well-by well basis

� Specification and design developed by FFEE

� Cost plus payment

� Exchange of sensitive information

FF

EE

_IN

S H

IGH

RIS

K

Realize capital investments in construction as soon as possible (so they can generate revenue)

� Understand how the capital investment fits with FFEE’s primary process

� Understand FFEE’s specific requirements

� Project management skills

� Clearly specify tasks and responsibilities of supplier

� Maintain time schedule (delays result in revenue losses)

� Management team consisting of proposal manager and technical representatives

� Purchasing � Technical

representatives � Tender board

� Feasibility of outsourcing scenario’s

� Schedule and deliverables

� Formalized contact points including hold and witness points and review moments

� Specification and design customized

� Fixed unit price per m3 and kWh output

� Exchange of sensitive information

FF

EE

_IN

S

LO

W R

ISK

Ensure timely availability of piping materials to prevent disruption of primary process

� Understand how non-availability of materials affects primary process (reliability)

� Enable

� Clearly specify how they want the supplier to contribute to the primary process

� Clearly specify

� Managing Director

� Sales/ account manager

� Engineers � Quality manager

� Supply chain engineer

� Global account manager

� Mechanical engineer

� Quality and delivery reliability

� Frequent communication

� Service design customized

� Standardization of materials

� Service centre


standardization of materials

tasks and responsibilities of supplier

� Project employees

FF

EE

_C

NS

Fulfill governmental requirements to clean up waste resulting from FFEE’s primary process

� Understand how service contributes to FFEE’s license to operate

� Reduce integral chain costs

� Create process which can pass (environmental) accountancy audit

� Clearly communicate locations and types of waste

� Communicate safety requirements

� Two account managers: one for contractual and one for commercial aspects

� Supply chain engineer

� Waste manager

� Coordination of activities

� Industry specific safety standards

� Scorecard results (HSE, savings, administration)

� Transparent pricing with flexible (maximized) profit margin

� Investments in company clothing and containers

� Supplier set up service centre


there have been no major problems in the collaboration. In a new contract however, the focus will be more on cost optimization issues in addition to just performing the drilling activities requested. A high risk instrumental service: engineering and construction services

FFEE has started a development project aimed at the profitable exploitation of an oil field. Steam produced by a hydropower plant is injected into the earth, resulting in oil “sinking” into specially constructed trenches (horizontal pits). The construction and subsequent maintenance of the trenches and the hydropower plant have been outsourced to an engineering & construction consortium. This service is targeted at the buying company’s primary processes, and represents a major investment: therefore, it is considered an instrumental service. The risk associated with this service purchase is large since it is a greenfield project involving large investments.

The key objective is to realize the production facilities as quickly as possible so that FFEE can start production. This requires the involvement of technical specialists (people knowledgeable about construction activities). Since this project involves an expansion of FFEE’s business activities, business development representatives are involved. This project involves a long-term collaboration (the life cycle of the oil field is estimated to be 25 years); the selection of the consortium was therefore done with the greatest care. Furthermore, the final decision was made by a tender board (higher management involvement), which consisted of the technical disciplines, finance, sales, et cetera (all represented by someone from the senior management level).

During the ongoing service exchange, a senior project manager and a core team of five to six people (a.o. engineering and quality) are dedicated to the consortium, with purchasing in an advisory role. The consortium is represented by a management team consisting primarily of a proposal manager and technical representatives (involved with the detailed design and execution of the development project). Communication

for the engineering services is intensive and formal and mostly concerns progress in terms of project realization and technical performance. The information exchanged is critical, since the plan to redevelop an existing oil field is considered sensitive information from a competitive point-of-view.

At the moment of studying this case, the project was still ongoing, and FFEE has been confronted with a number of delays. However, according to FFEE, this is inherent to a development project of this size, and FFEE claims to generally be satisfied with the services provided and the process of service provision.

A low risk instrumental service: managing stock of piping materials

One of the construction activities of FFEE concerns constructing pipelines. Three suppliers have been contracted to manage the inventory of the required materials (f.e. flanges and fittings) at FFEE’s construction sites. This service remains within the buying company and directly affects the (primary) construction processes of FFEE: this makes this service an instrumental service. Orders for materials (this is the majority of spend) and related services (i.e. welding, construction or digging services) are placed on a daily basis and vary in size from several euros to several millions of euros. Failure of service delivery can lead to delays in the construction activities, which can eventually result in claims of customers because of discontinued natural gas supply. The same goes for quality deficiencies in the materials purchased. The key objective is thus to maintain continuity of FFEE’s primary processes. Overall however, the risk involved with this contract is considered low, since the chances of a delay actually resulting in customer dissatisfaction are small.

This service affects the primary process of FFEE: non-delivery or low quality may cause delays. A mechanical engineer (contract owner) therefore is involved with designing the service process and ensuring its fit with FFEE’s primary processes. Since this purchase


concerns a European contract, a global account manager is also involved. After signing the contract, the contract owner and the supply chain engineer conduct quarterly review meetings with the supplier. Since delivery reliability and quality are important, these issues are discussed here. The coordination of supplies, the scope of activities and specifications remain with the business lines. Both FFEE and the supplier have made adaptations with regard to service specification and design (standardization of Stock Keeping Units).

At the beginning of the contract period, there were some problems; however, these were not too serious (no delays). The contract reviews demonstrate increasing performance and overall, FFEE is satisfied with the service provided and service provision.

A consumption service: waste management

Waste management refers to the collection of perilous waste, regular waste (coming from on and offshore drilling locations and office buildings), construction and demolition waste, processing of contaminated earth and drilling waste at various FFEE locations, and delivering it to appropriate processors. One service provider has been contracted for dealing with and carrying the administration for 80% of the waste streams. The service remains within FFEE and does not affect its primary processes: it is therefore considered a consumption service. Although the contract is critical with regard to environmental and safety regulations, risk is considered to be low.

The key objective here is to support the primary process by dealing with the waste resulting from production and abandonment of activities in an appropriate manner, as to safeguard FFEE’s corporate reputation and its license to operate. Consequently, the supplier has to conduct these activities efficiently, thereby understanding that good performance is critical for FFEE’s license-to-operate. FFEE has to be able to clearly communicate where waste can be found (internal demand) and the safety regulations that apply. This is ensured by

allocating the role of contract owner to a representative from the waste management department. The user has daily contact with the supplier about for example collecting containers. The contract owner and purchasing have regular contact with two account managers (marketing representatives) about execution of activities, the contract, optimization opportunities, et cetera.

There have not been any critical issues in this contract and FFEE is content with the service provided and service provision. The supplier has made some relation-specific investments with regard to clothing (because of safety regulations) and containers (which are rented from the supplier by FFEE). Furthermore, the supplier has set up a dedicated service centre, which serves as FFEE’s focal contact point. FFEE in turn has made some adaptations with regard to administrative procedures.

Cross-case analyses

Looking at the observations for the three service types, we see that the structural dimensions of interaction differ in line with the findings of Wynstra et al. (2006). Note that since our dataset did not contain component services, we were not able to investigate propositions 1a and 2a.

Regarding the interactive processes, we see that for semi-manufactured services, communication mostly concerns production progress and deviations that may occur, since this will immediately affect FFEE’s delivery to customers. Customer requirements are not an important topic in the communication, and we thus find that proposition P1b is not supported. This may be explained by the fact that FFEE’s customer is part of the same conglomerate, as a result of which there is less explicit attention for customer needs and wants. Adaptations have taken place with regard to service specification and design, and sensitive information about FFEE's value proposition has been exchanged. This provides support for proposition 2b.

For the first instrumental service studied, engineering and construction services, communication involves the


exchange of critical information, as well as how the service delivered affects the buying company’s primary processes (continuity of primary processes/ enabling production at new locations). We therefore conclude that proposition 1c is supported. Adaptations were mostly made with regard to organizational structure. Proposition 2c is thus supported.

For the other instrumental service, stock management services, the exchange of critical information was not so profound. In this case, proposition 1c is not supported. Adaptations mostly concerned administrative procedures, which does not provide support for proposition 2c. However, this instrumental service is characterised by low risk, which explains why we do not observe the expected patterns. The engineering and construction services were characterised by high risk: when comparing these observations to the findings for the high-risk semi-manufactured service, we can see that the patterns observed are clearly distinct, thereby providing support for proposition 3a.

When examining the findings for the low-risk instrumental service more closely, we see that the observations resemble the expectations for consumption services, which provides partial support for proposition 3b (note that since we have only one low-risk service outside the class of consumption services, we are not able to gather evidence regarding the first part of proposition 3b).

Finally, communication for consumption services namely focuses on the requirement of internal customers (the users at various production locations) and optimization opportunities. Consequently, adaptations are made to financial and administrative procedures, as to increase the efficiency of the collaboration. This provides support for propositions 1d and 2d.

To summarise: proposition 2b regarding adaptation for semi-manufactured services was supported. Proposition 1b regarding the importance of customer requirements in buyer-seller communication for semi-manufactured services was not supported; this was explained by the fact that FFEE delivers to

an internal customer (part of the same conglomerate), as a result of which there is less explicit attention for customer needs and wants. Propositions 1c and 2c regarding interaction processes for instrumental services were supported, as were propositions 1d and 2d (interaction processes for consumption services). The fact that the pattern for the low-risk instrumental service differed from the pattern for the high-risk instrumental service provided support for proposition 3a. The pattern for the low-risk instrumental service resembled the pattern for consumption services, thereby providing support for proposition 3b. Conclusions, limitations and further research

Research into buying business services has mainly focused on the initial stages of the purchasing process: not much attention has been given to what happens after the purchase decision has been made (Bryntse 2000). Purchasing and supply management is however not just a matter of completing individual transactions, but certainly also of dealing with supplier relationships on an ongoing basis. This is especially true for business services, which are characterized by their interactive nature.

Wynstra et al. (2006) recently brought forward a classification scheme based on the way the buying company uses/ applies the service and found that ongoing interaction between buyers and sellers of business services will vary for the resulting four types of services. They investigated several structural dimensions of interaction, i.e. the key objectives of interaction and the buyer-seller interface (functional representatives and critical capabilities). Processes of interaction were not included in their study.

This article has empirically investigated these interactive processes that take place between buyers and sellers of business services after the contract has been signed. We conducted an in-depth, embedded case study and found that for the process dimensions of interaction differences arise across the three types of services studied. We can not say however whether this variation is systematic; literal


replications of our study are required to verify this. Concerning the structural dimensions of interaction, our findings are in line with the findings of Wynstra et al. (2006).

Since our data-set contained services that varied in terms of the level of perceived risk involved, we controlled for risk in the analysis. This was important since Wynstra et al. (2006) found that interaction is more formally defined and designed for high-risk services. Our findings suggest buying companies define and design interaction with providers of high risk services more formally. This can be explained from the fact that for high-risk services, buying companies will think more consciously about how they design their interactions with providers of business services. For service providers, an understanding of this effect is important in order to be able to involve the appropriate actors and resources to deal with representatives of the buying company.

Based on these findings, we propose to use risk as a control variable in future studies. We cannot use risk as a selection criterion, since that would lead to almost excluding (usually low-risk) consumption services from our further studies.

Limitations and future research Despite the contributions made by this

study, a few critical notes should be raised here. One of these notes has to do with the selection of the cases: we were not able to identify component services at FFEE. This can be explained by the fact that we started our investigations at a manufacturing company: component and semi-manufactured services are more common and thus more easily found at service companies. This limitation could not be overcome in this study, but future studies should explicitly be aimed at investigating ongoing interaction for component services.

Another limitation concerns the fact that data was only collected at the buyer. In this case study, we were able to obtain information on all the dimensions of interaction, including dimensions that concerned the supplier (i.e. supplier representatives involved, critical supplier

capabilities). However, a concept like interaction should be studied by means of two-sided data collection. In future studies therefore, data should also be collected at suppliers.

Further research could be aimed at replicating the patterns observed in this case study at various other companies (literal replication (Yin 2003)). Studying services at many different companies will result in the inclusion of many different services: as such, generic patterns of ongoing interaction across the wide variety of services that organizations buy can be identified, which is important according to Smeltzer and Ogden (2002). This would also address the observation by Agndal et al. (2006), who conclude that purchasing and supply management research covering different types of services is scarce.

Since this study did not include component services, we propose to select service companies for the next study, since the chances of finding both component and semi-manufactured services are expected to be higher there than at manufacturing companies. We suggest performing this study at a limited number of buying companies, since this enables making detailed cross-case analyses. Furthermore, these studies enable us to verify which dimensions show consistent and strong variation; future studies focusing on just these dimensions can then be executed at a large number of buying companies or can be based on two-sided data-collection.

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Appendix I List of interview questions

Questions on the service being supplied 1) What is the service that is actually

being supplied (in terms of activities carried out for your company, personnel and equipment supplied, et cetera)? What is the frequency of service delivery and how important is timely delivery?

2) What does the (simplified) supply chain look like?

3) Could you please provide me with

some background information on the supplier company? You could for example think of: i) Part of the supplier company you

are dealing with ii) Product/ service range of the unit

you are dealing with iii) Types of customers and market

segments the supplier services 4) Which people/ functions are involved

with this service from i) the supplier’s part? ii) your company’s part? iii) your customer’s part? What are their respective roles/ responsibilities? Please distinguish between pre-purchase and post-purchase.

5) What is the position of the service in relation to your organisation’s offering to its customers? Is it: i) Consumed within your own

organisation? ii) Transferred (either directly or

indirectly) to the customer? iii) What are the consequences to the

customer of delivery and/ or performance failure?

iv) Could you give an estimate to what extent this service contributes to your company’s competitive position in terms of market share,

turnover and/ or profit (hardly, quite a lot, very much)?

6) How important is the service being exchanged? i) In terms of financial importance:

what share of purchasing expenditures is spent on this service?

ii) If applicable, in terms of importance for customer satisfaction (your company’s customers)

7) How complex is the service being exchanged? i) How many disciplines/ departments

are affected by this service? ii) What is the contribution of the final

customer in the service delivery process?

iii) To what extent does this service rely on expert knowledge of employees on both the buyer’s and the supplier’s side?

iv) To what extent does this service depend on support from information systems?

v) To what extent does this service have to be integrated with/ adapted to existing systems and/ or existing service offerings?

8) How novel is the service being exchanged? i) In comparison to existing service

offerings/ the offering preceding this offering, to what extent is this service new to the supplier organisation/ employees (not at all, a little, very different)?

ii) In comparison to existing service offerings/ the offering preceding this offering, to what extent is this service new to the customer organisation/ employees (not at all, a little, very different)?

Questions on the service purchasing process 9) Which departments are primarily

involved in the purchasing process? i) Which departments are

represented in the purchasing team?

ii) Which functions represent these departments? Which function

Supplier Focal

organization

(B2B/B2C)

Customer

(internal/ external)


carries main responsibility and/ or has the “final word” in decision-making?

10) How does supplier selection take place? i) Is there a list of preferred

suppliers? ii) How many alternatives are there

and what is there respective attractiveness? What are the costs and difficulties associated with switching to another source? What is the market structure/ competitive situation?

iii) What are important selection criteria?

iv) To what extent is the service contract detailed before selection actually takes place?

11) To what extent can the characteristics of the service be determined in advance of the purchase/ development project? i) To what extent can the service

concept be designed in advance of the purchase/ development project?

ii) To what extent can service delivery be designed in advance of the purchase/ development project?

iii) To what extent can performance characteristics be determined in advance of the purchase/ development project?

Questions on “life after the purchase” 12) What does the customer-supplier

interface look like after the purchase has been made (communication and coordination mechanisms, boundary spanning roles, and DMU/PSU structures)? i) Which departments/ functions are

primarily involved in the interactions?

ii) Which departments/ functions are involved in managing the ongoing supply after the purchase of a service? How does this take place?

iii) Which departments/ functions are involved in managing the supplier? How does this take place?

iv) Who are the counterparts of these functions on the supplier’s side?

13) What are the most important issues discussed in the interaction? i) What are the respondent’s contacts

with counterpart in terms of frequency, form, topic, who was contacted?

ii) What are the respondent’s contacts inside the buying company in terms of frequency, form, topic, who was contacted?

iii) What are the contacts of others inside the buying company with counterpart in terms of frequency, form, topic, who was contacted?

iv) What type of information is requested from and provided by the counterpart?

14) Is this relationship characterised by frequent or little exchange? In between exchange episodes, is the amount of interaction considered to be low, medium, high?

Questions on the long-term relationship 15) Could you please provide me with

some background information on the nature of the relationship? i) How long has the relationship been

in existence? ii) How was this relationship

established (in terms of reason for and approach to)?

iii) What is the criticality/ overall importance of the relationship?

16) Have any relation specific investments been made by either or both parties to accommodate the service exchange? i) Have any special financial

procedures been developed for the benefit of financial exchange between buyer and supplier?

ii) What adaptations have been made, proposed or discussed by the parties involved in the relationship (for example: modifications of product specifications, product design, manufacturing processes, planning, delivery procedure, stock holding, administrative and financial procedures)?

iii) What were the reasons for these initiatives? What people were involved in the development of


propositions, discussion, and execution of adaptations?

iv) How would you describe the social character of the relationships between members of the buying and supplying organisation in terms of trust, openness, personal friendships, social contacts, et cetera?

v) What is the buyer’s impressionistic character of the counterpart?

vi) What is the buyer’s impressionistic character of the dependence between buyer and supplier (mutual shares)?

vii) Have there been any critical issues during the history of the relationship? Please explain how these have been solved.

Additionally, information will be gathered on the companies involved in the focal relationship (through studying documents, electronic sources, et cetera): 1) Customer company:

i) Company size (number of employees, turnover, profit, size, production technology, degree of (international) orientation, organisation, competences);

ii) Product/ service range; iii) Types of customers and market

segments; iv) Organisation of the purchasing

department; v) Organisation of Decision Making

Unit. 2) Supplier company:

i) Company size (number of employees, turnover, profit, size, production technology, degree of (international) orientation, organisation, competences);

ii) Product/ service range; iii) Types of customers and market

segments; iv) Organisation of counterpart of

Decision Making Unit. 3) Absolute and relative total value and/

or volume of business placed with the supplier counterpart during history of the relationship.

4) Characteristics of the individuals involved in the interaction in terms of

functions, roles, status levels, education, qualifications, job-experience, language competence.

5) Information on terms of trade, contract procedures and protocols.


External interaction as a means of making changes in a company: The role of purchasing in a major turnaround

for Ducati.

Roberta Bocconcelli a and Håkan Håkansson b a Roberta Bocconcelli, Research Assistant, Università di Urbino (or University of Urbino) Facoltà di Economia (or Faculty of Economics)

ISA-Istituto di Studi Aziendali (or Department of Business Studies) b Håkan Håkansson, Department of Innovation and Economic Organisation Norwegian School of Management BI, Oslo, [email protected]

Abstract

The interplay between internal organizational factors and external interaction is in focus in this paper. The paper describes the turnaround of the motorbike producer Ducati, in terms of how the company systematically changes this interplay. The paper shows how Ducatti changed its internal buying organization and developed a more interaction friendly structure. The importance of the interplay between internal organization and external interaction has become more important as companies have become more specialized and in this way more dependent on their external counterparties. The paper argues that the only way that such a highly specialized company can achieve a turnaround is if they manage to get their most important counterparts to become involved in a mutual change process.

Keywords: Organisational structure, turnaround, interaction, purchasing

1. Interaction and the way a company

functions internally

The internal way a company organizes its production, flows of material and technical development is closely related to the way it interacts with important customers and suppliers. To put it differently, the way a company is organized internally determines how it can interact with its counterparts. This is a crucial aspect for management in many different situations. For example, if the company wants to develop its relationships with customers or suppliers, it normally changes its way of functioning internally. Likewise, if the company wants to develop its internal efficiency, internal changes have to be accompanied by changes in the way it interacts with important counterparts.

Thus, the influence goes in both directions. A certain way of organizing and functioning internally can restrict how the company interacts, and ambitions to achieve

a certain interaction require a certain internal organization. This general dependency will be penetrated in more detail in this article with the help of a description and analysis of a company case. In this case we will see how the interaction with customers and suppliers is closely related to the production and organization of an Italian motorbike producer. The starting point for the case is the need for a major turnaround. 2. How to create a turnaround in a highly

specialized company

Our modern economy is full of highly specialized companies. Increased specialization has been accomplished in two complementary ways affecting both the output and input sides of the company. One is a concentration to a more limited range of product or service on the output side. The other is an increased outsourcing giving the suppliers an increasing share of the total


value of creation/production. This increased specialization creates an interesting situation for a company that has to make some kind of “turnaround” due, in part, to severe financial problems. This article is about such a situation. We will analyze the changes made by a highly specialized producing company facing the need to make a turnaround.

A highly specialized company with severe economic or financial problems has somewhat different problems compared with a traditional producing company. A traditional producer does a majority of the production activities itself and a turnaround is usually directed toward changing the internal activities, i.e., increasing internal productivity. This is not the case for a highly specialized company. It is usually focused on a set of a few products and specializes in performing some narrow production activities (if any). It is not possible for such a company to turnaround by changing its internal activities in isolation: it has to involve and interact with external partners, often on both the customer and supplier sides. Changes have to include these counterparties thereby making them modify their way of functioning. One reason for this is that an increased specialization goes hand in hand with an increased activation and utilization of resources outside company boundaries.

Making such a turnaround is certainly not an easy task. One major challenge is mobilizing all of the external counterparts with which the company interacts to become involved in a change process. They have to be approached and convinced that it is in their interest to change the way they interact with the focal firm. This is to argue that the earlier interaction methods have some important weaknesses and the new way can result in something more positive for both sides. Another related problem that is a prerequisite for handling the first one is for the company to get the personnel within the focal firm to change their way of working in a relevant and coherent way. One reason for this is, of course, that the previous way of behaving in the interaction by the focal firm has to be changed. This is difficult for all organizations as the interaction has been developed over many years and has become embedded in many routines and procedures. So, it is a problem to get its own personnel to change, which, in turn is a prerequisite to get

the counterparts to change. However, in some cases it is even more difficult as the change involves not just breaking with the old way of interacting but also with what is generally supposed to be the best way to interact. This is the case for the purchasing side in the case that will be presented here. The new way that the company has to develop goes very much against the classical way purchasing has been handled. The main purchasing advice has been to try to establish better “markets” for the input products but this will not work now. This is obvious in traditional purchasing textbooks but can also be found in “modern” purchasing models such as the most commonly used one—Kraljic (1983)—and modern purchasing books like Van Weele (2005) Furthermore, it is also an obvious element in theoretical approaches such as transaction cost and the resource based view. This view is challenged if interaction with the suppliers is put into the focus (Gadde & Håkansson 2001, Gadde & Snehota 2000). Then another type of questions come into forefront such as how should the interface with the supplier be designed (Araujo et al 1999) or how can we find positive cooperative possibilities in whatever type of situation there is (Håkansson & Persson 2007).

An interesting consequence is that the way the company solved this situation indicates that markets are no longer sufficient from an efficiency point of view. There is need for a structure where it is possible to interact in a way other than a straight market exchange. This interaction, it seems, can create more cost efficient solutions for the buying company than the market solution. This is, of course, a very provocative conclusion as the free market is assumed to be the most cost efficient solution that can exist from a buying point of view. However, the following Ducati case gives at least one reason to question this assumption. In this article we will describe how Ducati made a major turnaround through developing its way of interacting with customers but especially with suppliers. 3. Ducati Case – background and problems 3.1. The background


Ducati is well known worldwide for its sportive motorbikes, but it started in 1926 as “Radio patents Ducati” with the main intent of producing industrial components for the growing radio transmissions industry, components that were produced thanks to some patents by Adriano Ducati (the data collection for the case is described in the appendix). The first product, the “Manens” condensator for radio apparel, followed by other complementary products, had great worldwide success, allowing the firm to rapidly grow and to obtain the respect of the international industrial community. In 1935 the company built a new and ambitious site in Bologna (the same site is used today) with the intent of forming an important industrial and technological “centre” in Bologna. In the same period Ducati amplified its international activities and opened new offices in London, Paris, New York, Sidney and Caracas to ensure direct services and assistance to its customers. At the Milan Fair in September 1946 Ducati presented “Cucciolo”, an auxiliary engine to put onto a normal bicycle. This engine was sold in a particular assembly box and the final customer had to “attach” it to its own bicycle. After a short time the company decided to also develop a special frame to combine with the Cucciolo making the engine turn rapidly, with some adaptations, into a small motorbike. Thanks to Cucciolo and its derivates, Ducati also became an important company in the mechanical industry. The years from the 1950s to the70s represent the definitive passage to the mechanical/automotive sector and the brand Ducati is now exclusively associated with sportive motorbikes and with the Desmodromic engine developed by Ducati’s engineer in the 1960s. In 1983 Ducati was acquired by the Cagiva Group (another Italian automotive company). In the following period the company had a very intense growth period that culminated in the launch of the famous “Monster” Model. But Ducati entered a more problematic period and, after a financial crisis in 1996, Ducati was bought by the American Texas Pacific Group. The new owner brought the necessary liquidity and a new group of international managers. The new management, together with the previous group of product development engineers,

began a turnaround that ended in some important results in terms of revenue and profits. One result of the turnaround period is the entering of Ducati Motor Holding into the Stock Exchange in New York and Milan. The problems identified

At the end of the last century Ducati was, among motorbike users, identified with good design but also that it required a driver who could handle technical problems. Ducati’s own perceptions of the problems were that the financial crisis was due to both increased costs and insufficient product quality. There was a need for increasing efficiency as well as becoming more innovative.

Among all the improvements identified, the changes on the consumer or user side became the most public. The ambition went from selling just a motorbike to offering a whole lifestyle or to “transform progressively Ducati into an entertainment company offering a complete motor experience”, as it was formulated by the company itself. However, a far more important improvement, from an operational point of view, was the total re-modeling of the supply chain. Ducati’s deficiency in its own productivity was obvious. There were easily identifiable weaknesses in both the production and in the logistics. There were also problems in terms of quality development of components and sub-systems. An internal investigation showed that the company could improve its internal productivity by about 20%. This was regarded as a significant possibility by the management until this figure was related to the product calculation. The effect of such an improvement on the total product cost was insignificant—only 4%. The reason was that Ducati’s share of the total product cost was only 20%; purchased components and outsourced sub-systems accounted for 80%. This is, in turn, an effect of the increased specialization that Ducati, as most other modern western companies, experienced during the last decades. Increased specialization is often combined with outsourcing of more components, parts or whole systems to external suppliers. The single company will, as a result, be


responsible for a smaller part of the total product cost. Consequently, the suppliers take a larger share of the total product cost and for many producers their share is 70-80%, as in the Ducati case.

The management team of Ducati realized that this “substantial” improvement in internal productivity created such a small improvement in relation to the products sold that it could not be the base for the needed turnaround. The fact is that, independent of how much they could improve internal productivity, it could only affect 20% of the product cost—80% would be outside any such improvement. The conclusion was simple and obvious. The key issue was not to focus on an internal change—the turnaround had to be based on external changes in relation to customers and suppliers. Without changing the way they interacted with customers and/or suppliers Ducati’s chances were very bleak. Thus the important change had to take place in the interaction processes with customers and suppliers 4. The turnaround process 4.1. The marketing side

The change in Ducati’s vision and strategy centered on the interaction with the customer and on the value creation for him/her. The turnaround process started from the statement that in a company as Ducati “the traditional marketing, decomposing the market in homogeneous clusters of consumers and coming up with effective action for each of them, doesn’t work…The unique unifying element for all the customers is simply the motor…” (from an interview with Antonio Ducati, 2003). On one side the management recognized the importance and the force of the product both from the image and from the incorporated technology point of view (i.e., the desmodromic technology that was considered a very distinctive and

important feature of the product), on the other side management faced weaknesses in both the internal and external organization with a serious problem of function integration and lack of managerial skills, which had a negative effect on the interaction with potential customers.

The first action undertaken was the revamp of the Ducati brand through the reinforcing of the unique brand character associated with a broader product performance with the main objective “to transform progressively Ducati into an entertainment company offering a complete motor experience” and create a Ducati Community around the focal product “bike-accessories-apparel”. This included the creation of a DOC-Desmo Owners Club, new Ducati stores, a museum connected to the factory, a number of special events including participation in racing, and advertising. In this way Ducati was related to a whole life style.

This change can also be seen in the percentage of the revenues from accessories and gadgets that increases from 10% to 19% between 1997 and 2004. (see Table 1).

The first “World Ducati Weekend”, an event organized in Misano (near Bologna), was a great success drawing 10,000 Ducati fans from all over the world. The design and opening of new DucatiStores had some important effects. The philosophy of a DucatiStore is completely different from a traditional reseller shop. A DucatiStore is directly owned by Ducati and managed with particular attention to the creation of a unique atmosphere. The opening of the Ducati Museum in the Borgo Panigale factory and the return of Ducati Racing in the GP in 2002 concluded this process.

These actions that can be seen as a very traditional marketing strategy change, actually mirror a radical internal change that originates and develops from a complete re-examination of the Supply Chain concept and Supply Chain management principles in

Table 1 Ducati’s sales revenue

1997 2000 2004 - Motorbike 90% 85% 81% - Accessories / Gadgets 10% 15% 19% (sportswear,….) 100 100 100


Ducati. It’s very significant that the phrase “…In the last years the customer becomes and will remain the centre of the Ducati’s world and activity” was formulated and used by the Purchasing Director before it was used by anyone who was responsible for the company’s marketing.

“In the automotive sector, innovations in product projects and development activities are obviously important, but first of all, in our case, the innovations in business processes are the most important…It was the innovations in this field that allowed us to reach significant cost reduction and value creative goals, in particular innovations in the supply network management…The first question we posed was, where does the customer value originate? The value concept has to be integrated into the whole supply chain. The most important innovation in Ducati was the revolution in the ‘operations’, that is all the activities linked to the production process both from an internal and external perspective, in relation to the value creation in the entire supply chain” (From an interview with the Purchasing Director, 2004). If we look at this statement from an interaction point of view, the manager is pointing to the importance of a symmetry between what is going on internally with what is taking place in the interaction with customers and that this has to be directly connected to what takes place in the interaction with suppliers.

This is the point of departure for the Ducati Improvement Process or Change Management that derives from the statement that the value for the customer depends and is generated in the entire supply chain in an integrated vision. It is not simply a restructuring of the Ducati supply chain in a purely efficiency way, addressed to cost reduction and waste elimination, but a re-organization that begins with the identification of the critical nodes of value creation and then “enlarges” upstream and downstream in the supply chain. The main targets and constraints of this change process were focused both on internal production activities as well as on the suppliers’ activities. However, the main consequence of this change is that the interaction with the suppliers has to be developed in order to create the customer value but also to better relate what is going on inside Ducati with

what is done by the suppliers. 4.2. The purchasing side

In this perspective it is clear that the upstream relationships have to be considered essential for the achievement of the company’s goals “…The change in Ducati wouldn’t be effective if it would remain into Ducati’s boundaries…The reached improvement had to be extended where most value is created, throughout the supply chain…” (From an interview by the Purchasing Director, 2006). The revolution in the purchasing strategy has followed two main principles:

i) identifying what is of value for the customer, what the customer is willing to pay for;

ii) mapping and putting into the right sequence the identified value activities and removing or rationalizing all other activities following a lean supply logic.

These two principles led to a complete new philosophy and organization of the purchasing activities following the changed philosophy of the company: “…We are not more reasoning in terms of goods’ categories, but in terms of customer’s value creation in our purchasing activities…It has been a very important shifting from ‘commodities’ to ‘supply chain’ categories…” (idem).

Previously (until 2002) the purchasing function just had operative and administrative goals and was internally structured into “commodities sub-functions”, each of them responsible for the purchase of some well identified groups of goods (see Figure 1). The people in charge of each sub-unit had developed specific competences just on the materials and corresponding suppliers they were responsible for “…losing touch with the final product and with the creation of value for the final customer…” (idem). The result was that, in the company, diverse people (logistics, quality, projecting, purchasing…) were involved in different manners in the same supply, with many problems in terms of relationships with suppliers, that were forced to dialogue in an incoherent way with different people, and in terms of conflicts among internal organization units. In this way, the suppliers met a counterpart that was


composed of a number of different units with very different opinions and evaluation criteria. Thus the internal organization within Ducati created problems in the interaction with the suppliers. It was impossible for the supplier to understand what Ducati wanted out of the interaction as Ducati itself had problems with it. This is a normal problem in companies with a specialized purchasing function, which often stresses the importance of competition between suppliers in order to lower the price while other units are more concerned with quality and deliveries. There will often be double messages from the buying company.

To find another way of interacting with the suppliers the purchasing function had to be changed. Today it has been renamed “supplier development” and it is organized into five basic units that bring together all the competencies to manage the purchasing activities on a “supplier development” and it is organized into five basic units that bring together all the competences to manage the purchasing activities on a “supply chain” base

in relation to macro-assembling groups: color, electronic, engine, functional groups, commodities (see Figure 2). The purchasing activities are now supported by inter-organizational teams composed of five senior buyers in charge of each of the five “supply chain units” and the respective junior buyers (12 in total) and different people from logistics, product development and quality.

If we consider now, for example, the chain “color”, previously the purchasing operations involved in this chain (considered a “chain” of high value for the final customer) were managed by different buyers with different buying competences in terms of single commodities (frame, rims, plastic components) with a lot of difficulties in terms of coordination. Now the objective of each single group (managed by a single buyer) is to ensure that each single component involved in the same “value chain” is developed, produced and delivered following the same “logic” in a coordinated way.

From the final customer’s point

Figure 1 The earlier purchasing organization

AD

R&D Operations

Purchasing

Sales

Direct iron materials Direct non iron materials

Electric materials, plastics,

commercials…

Indirect materials, services, plants

Finance

Personnel

Quality

I.T.


Figure 2 The purchasing organization after the change of view, the result is that he doesn’t have to wait 60 days for his order if he changes his mind about his first color choice after placing the order in a Ducati Store, but just five days. The different components had very different supplying times, ranging from one month for a frame, two months for rims and 15 days for plastic components and the total lead-time was equal to the time of the slowest component. With the new approach, the entire process could be analyzed in a coherent way among the different components of the chain and with stress on the slowest component, to shorten the total time. Mapping the materials flow along with a very strict stocking policy allowed the company to reach a total lead-time of five days for the change of color.

The same can be found with engine performance or electronic equipment and not

only at the choice moment, in terms of customization of the product, but also in the post-sale phase, for example in case of a malfunctioning of the product. The problems are more easily individualized and more quickly solved thanks to the competences accumulated in Ducati and, above all, in Ducati’s supplier network.

The supplier can now meet a buyer that is able to discuss all combination of problems—including different sets of costs, quality and delivery alternatives. It is possible to discuss the effects of different solutions for both sides and to find suitable compromises given that the supplier is also organized in a similar way.

In general the new and closer interaction with suppliers created the following advantages for the involved companies:

AD

R&D Operations

Suppliers Development

Sales

1 Color

2 Electronic

3 Engine

4 Functional

Groups

5 Commodities

Buyer

Logistics

Product Dev.

Quality Inspector

Buyer

Logistics

Product Dev.

Buyer

Logistics

Product Dev.

Quality Inspector

Buyer

Logistics

Product Dev.

Quality Inspector

Buyer

Logistics

Product Dev.

Quality Inspector

Finance

Personnel

Quality

I.T.

Quality Inspector


- better planning of time resulting in lead time reduction for the buyer;

- cost reduction: the enlarged picture of the components in a single “order” allowed for a better understanding of how costs evolve in different activities across firm boundaries;

- quality improvement: the new way of interacting increased the possibilities both to increase the innovation content in each relationship and to combine different suppliers, i.e., it was useful to deal with potential incompatibilities among the suppliers;

- product development processes across company borders were facilitated resulting in time reduction.

At the same time, a single supplier

dialogue now can not only solve diverse problems easily and quickly thanks to the multifunctional team, but can also develop coherent objectives and find common solutions to problems connected with both product development and production including deliveries. 4.3 The suppliers’ involvement process

The internal change within Ducati was a reflection of the basic changes that appeared in the interaction within Ducati’s supply network, including within its suppliers’ relationships. The new “orientation” was the result of a number of highly complex projects

together with some key suppliers. Seen from Ducati’s side these projects involved three main elements:

- outsourcing - reduction of the number of

suppliers and rationalization of the suppliers’ portfolio

- strategic and operational integration

Outsourcing

One important element in the changed interaction has been a systematic analysis of where to perform different production activities. One important starting point has been an analysis made by Ducati where the value the component/product/service had in relation to the value for the final customer was related to the necessary competences to produce it (see Table 2). One effect has been that some assembling phases, some mechanical processing, the distribution of spare parts and accessories, were externalized. In particular inbound activities (collecting components from suppliers, Ducati’s internal warehouse and the sourcing of assembly lines) and outbound logistics ( packing and delivering bikes) were outsourced. One important change in the interaction was an increased utilization of external resources and capabilities despite the fact that at the start Ducati already was highly dependent on these resources.

Table 2 Where to produce (Source: Ducati)

Valu

e

+ SUPPORTING Selective outsourcing

Outsourcing: spare parts logistics, inbound logistics,

outbound logistics In house: assembling

CORE

In house Projecting, purchasing,

marketing

_

MARGINAL

Outsourcing Canteen, mail, employee

payments, …

STRATEGIC Selective outsourcing

Outsourcing: aluminum processing

In house: steel processing

_ +

Competencies


Reduction of the number of suppliers and rationalization of the suppliers’ product portfolio

One very distinct change due to the

developed interaction was a significant reduction in the number of suppliers it used. From 1997 to 2004 Ducati reduced the number of qualified suppliers from 380 to 170 (see Table 3). This was primarily due to the fact that all suppliers were not prepared to take on the increased responsibilities and engagement in a close interaction. Additionally, it was also an effect of an increase in the supply of pre-assembled complex systems instead of single components. Today the 170 first tier suppliers supply complex assembled groups and are fully responsible for the sub-suppliers’ network beyond and for the technical/functional competencies of the whole system. Of the 170 suppliers, nine account for 40% of the supply costs and 36 for 80%. The five most important suppliers (wheels, braking system, head-engine, basements, cylinders and pistons) are located in Italy and two of them in Emilia-Romagna, near Bologna. The changed interaction seems to enhance the position of the closely situated suppliers. It might be both easier and more motivating for them to increase the interaction with the buying company compared with suppliers being located farther away. Strategic and operational integration

The reduction of the numbers as well as the increased concentration in terms of volume and geographical location is a reflection of a more intensive interaction based on collaboration and integration of

activities and operations. The increased interaction takes advantage of the competences accumulated over years in the mechanical industry and of the proximity of the suppliers in terms of logistics and operational process management. The “choice” of the strategic suppliers is based on history and the selection was made based on how suppliers responded to the proposal to participate in the Suppliers Partnership Project. Most of the already highly involved suppliers accepted and invested in some conjoint initiatives that changed the content of the interaction in a substantial way:

- Participation in DESMO projects (Ducati Evolution & Supply Management Optimization) an acronym reminiscent of the famous “desmodromic” engine, developed by Ducati. This project can be considered the core of the entire suppliers partnership project. DESMO is based on the transfer and development of particular methods and techniques designed to reduce waste in both the products and logistics/production processes in the supplier’s plant. The DESMO is composed of three modules: cost analysis, process analysis and product simplification. Until 2005, 14 DESMO projects were completed that led to an average product cost reduction of 5%;

- Mapping of flows to reduce the lead time;

Logistics coordination. In 2005 about 12 suppliers worked in JIT with Ducati. With some of them, thanks to collaboration with logistics suppliers, also Just in Sequence methodologies was implemented;

- Training;

Table 3 Number and location of suppliers

Number of qualified suppliersLocal (district) 60 Italy 80 EU Countries 20 Extra-EU Countries 10 TOTAL 170


- Network data interchange platform

development based on Internet technology. All these tools have been useful to a

larger or lesser degree in single relationships due to differences in the earlier interaction. The main positive effect has probably been that they forced all the involved actors to make a very systematic analysis of the existing interaction and suggested different types of improvements. 4.4 Results

One important result is that Ducati managed to increase its production from 12,000 to 40,000 bikes per year without increasing the number of employees or changing the production site. This had very positive effects on revenues and profit and resulted later in the introduction of Ducati shares on important stock exchanges.

Another important effect is that the make/buy ratio has been further developed through increased use of suppliers. The activities performed within Ducati’s Borg Panigale plant is now only 8% of the total, i.e., 92% is done by suppliers. Of the 8% just half refers to the internal mechanical transformation activities (production of head-engine and basements, that covers 35% of the total needs and production of drive shafts), the remaining refers to the assembly process. 5. Discussion

This case can be seen as an example of how interaction can be used as a means to change the position as well as the results of a specialized company. Ducati is a highly specialized company that is making a turnaround through changing its interaction with customers and suppliers. This is a distinct break with how the interaction was conducted before, especially in relation to the suppliers. This is also an example of how little attention interaction processes usually get. When they are seen as just a “market mechanism” without any problem-solving content, there are no reasons to consider them. But, as soon as they are believed to have a potential content in terms of creating

opportunities to find new technical and commercial opportunities the situation becomes quite different. Then, one key question is what kind of ambitions the company has to utilize these problem-solving and opportunity-creating processes. The case is a good example of both what can be achieved and of what is required to start such a major change of interaction processes, which in this case also resulted in a major turnaround process.

If we start with what is achieved, the major result can be seen as the accomplishment of a much more fine-tuned orchestra of suppliers. A supplier is, in itself, a set of activities based on a complex resource constellation. If a buying company wants to utilize such a resource constellation in a more extensive way there is need for a difficult and time-consuming interaction process. This process can be developed over time and there are no limitations as to what can be done. This is especially the case when the supplier’s way of using different sub-suppliers is included and/or how the single supplier can be combined with complementary suppliers. In this case the activities performed by different suppliers and the producer were related to each other in a more systematic way than was done previously. There were a large number of adaptations of these activities in order to increase efficiency in terms of the produced components as well as the final motorbike. In the same way the resources used by the different involved companies went through a process where they were more thoroughly combined also across company borders. Both the relating of activities and the increased combination of resources required that the involved supplier companies were mobilized to take part in a more intensive interaction process with Ducati and with each other.

To achieve this increased efficiency and better use of resources there are also some important changes that had to be accomplished. One very crucial ingredient is that Ducati revised its purchasing methods. It was such a big change that the company even changed the “name” of the unit from “purchasing” to “supplier development”. The classical way of purchasing did not create the type of interaction the company was looking


for. The key issue in the traditional way of purchasing lies in the decision where to buy—in the selection of the best supplier. All established purchasing decision models focus on this aspect. However, this is not the key issue in the supplier interaction method developed by Ducati. The key issue now lies in how to find the best way to interact with the suppliers. There is certainly a selection of suppliers but this is much more long term and closely related to how to interact—the suppliers must be prepared to take part in this close interaction. It is in this way more of a self-selection—who is prepared to be an active and highly involved counterpart.

Changing the purchasing organization is one example of those internal changes that must be made within a buying company when it wants to change its interaction with suppliers. This can also be reversed to state that an organization’s internal changes will always have effects on the interaction with its counterparts. To gain a certain interaction, an organization has to be oriented toward conducting this interaction. This was manifested in the Ducati case in terms of creation of special teams that were responsible for the interaction. These teams included people with competence in technical dimensions (production as well as product features) and in logistical processes. The ambition was to create a team that had both the competence and ability to handle intricate problem-solving processes within the interaction and would influence the counterparts to create similar teams. Thus, one key issue is to get a set of specialists involved from both sides in order to find not just the right competence but also the right attitude toward the interaction process. The activities are geared toward creating a positive, creative problem solving process. Thus, in order to interact in a problem-solving way there are important reasons to design an organization to get people involved that have a certain attitude as well as a certain competence.

The internal changes must often also be mirrored by some of its counterparts’ (suppliers’) internal changes. These can be larger or smaller dependent on how the suppliers interact with other customers. Some of them might already have a suitable organization while others (many) have to go through some major internal changes. This

can be initiated and influenced by the buyer through the content of the interaction process.

There is also an external change that is important in relation to the buying company. This regards the way single suppliers are related to each other. It is a question of how to organize the total production and development work conducted by suppliers and sub-suppliers. To what extent should they be systematically related to each other? First is how single supply chains should be organized and second how these chains should be intertwined. The question is how ambitious should the company be in creating a tight supply network. This is very much related to the utilization of different types of interdependencies (Håkansson & Persson 2007). All types of serial, pooled and mutual interdependencies can be found in the total structure. Each type requires special attention and special activities

The internal and external changes described above are necessary for creating the basic conditions for the interaction but must also be formed together with the counterparts. In this case the development of these interaction processes was systematically influenced by the use of certain tools. Furthermore, this development of the interaction must never end—it must continue and new forms must evolve as it is developing. The systematic efforts are used both to get the process started and to continue development day by day. This must be done in two complementary ways. One is a conscious process of development with each single supplier and the other to systematically combine each relationship with some of the other supplier relationships. These systematic efforts include a number of different activities. Some of them are related to the use and activation of specific resources, others regard the design and control of development, production and handling activities and a third type regards the handling of relationships with the counterparts. Let us have a closer look at each of these types starting from the last one.

a) Configuring the relationships: One crucial aspect is to find a suitable interaction form within each supplier relationship. One important part can be for both sides to increase their


consciousness as to how the interaction can be used to influence costs and revenues. Here the use of the DESMO tools was one ingredient. Another is that by focusing on the relationship and its way of functioning, the other party is also influenced in the same direction.

b) Designing the activities: In this case, Ducati works hard with developing operations, and the DESMO project is one important starting point. However, in the long run the involved companies have to refine and develop these type of projects as the total activity pattern must always be developed further. Ducati has to develop its tools but it has also to encourage the suppliers to develop their tools. If not, the supply network might easily turn into a very hierarchical one creating more problems.

c) Combining the resources: The designing of activities has a significant impact on the total efficiency—combining resources has the same effect on the innovative capability. Single resources as well as constellations of resources have to be combined. This is one of the reasons why the involved teams should include several types of specialists. There are so many different resource items—both tangible and intangible—that might be combined in better ways within both single supplier relationships and, even more, across different supplier relationships. The importance of the combining ranges from whole constellations to single resources. An interesting example is the combining of tangible and intangible resources. These can be combined in many different ways especially as they are adapted to each other over time. In this case, the intangible resources are also the glue between the tangible resources increasing their value for the involved actors. This is, probably, one of the most important reasons for the positive effects that Ducati created through the more extensive interaction with the suppliers.

Another interesting aspect that

emerges from this case is that Ducati’s turnaround process did not start out from either a very extensive analysis of the situation or from a very developed theoretical model. Instead, the early phase of the turnaround was dominated by the use of strategic and operational instruments and theoretical models that are not actually very sophisticated or innovative—outsourcing, reduction of the number of suppliers, strategic and operational integration, lean supply philosophy and the Kraljic matrix. On the contrary we could consider them very traditional if compared to the mainstream literature on purchasing or SC management. Through the company’s increased consciousness of cost and revenue influencing factors, the effect became highly innovative at the end. The result was a turnaround process that certainly is not just impressive but also from which much can be learned. Appendix

Data collection

This case is mainly based on in-depth direct interviews with the managers of Ducati Motor Holding S.p.a. and on written material from the company.

The first contact was in March 2003 when the company was asked to take part in a research study concerning purchasing behavior in medium sized companies in the mechanical sector in Italy. The first interview was carried out through a semi-structured questionnaire with the purchasing director of Ducati Motor Holding. In the same period we had the possibility to collect some additional information regarding Ducati from two of its suppliers—one large company located in Bologna, near Ducati, and a small enterprise (located near Pesaro) that was contacted in the same research project (Bocconcelli, Tunisini 2006; Bocconcelli 2005).

The data collected from Ducati and from Ducati’s suppliers, was considered interesting and stimulated a next step in the investigation for the development of a specific case study based on the Ducati turnaround. In December of the same year the purchasing director was contacted again to


more precisely map the most important steps of the turnaround process. Based on this data a first draft of the case was written.

In 2005 two more extensive interviews were conducted with Ducati: the first with the Information Systems manager and the second one with the same purchasing manager as above who, in the meantime, had changed his position. Now he was one of the partners of Ducati Consulting S.r.l., a company born to exploit the competences developed during the turnaround process.

In 2006 there was a follow up interview with the same manager in connection with a workshop at Urbino University where he also presented the Ducati turnaround for an academic audience. References Araujo, L., Dubois, A., & Gadde, L-E.

Managing interfaces with suppliers. Industrial Marketing Management. 28, 497-506.

Bocconcelli, R. (2005) Creazione del valore per il cliente finale e Supply Chain Management: il caso Ducati. II Convegno annuale della Società Italiana Marketing: Tendenze evolutive del marketing dei servizi. Trieste. 2-3 Dicembre.

Bocconcelli, R., & Tunisini, A. (2006). Cambiamenti nel comportamento d’acquisto delle medie imprese industriali: un’indagine sul settore meccanico. Sinergie. 70.

Gadde, L-E., & Håkansson, H. (2001). Supply Network Strategies. London: Wiley.

Gadde, L-E., & Snehota, I. (2000). Making the most of supplier relationships. Industrial Marketing Management, 29, 305-316

Kraljic, P. (1983). Purchasing must become Supply Management, Harvard Business Review. September/October, 109-117.

Persson, G., & Håkansson, H. (2007). Supplier Segmentation – When Supplier Relationships Matter. IMP Journal. 1 (3), 26-41.

Van Weele, A. (2005). Purchasing & Supply Chain Management: Analysis, strategy, planning and practice. 4th ed. London: Thomson International.


Towards a Model for analysing Supplier Relationships when developing a Supply Network

Ann-Charlott Pedersen a, Tim Torvatn b and Elsebeth Holmen c

a Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, Trondheim,

Norway Phone: + 47 73593503, e-mail: [email protected] b Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, Trondheim,

Norway Phone: + 47 73593493, e-mail: [email protected] c Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, Trondheim,

Norway Phone: + 47 73590464, e-mail: [email protected]

Abstract In this article we propose a model for analysing supplier relationships when developing a supply network. The model takes the buying firm as the point of departure but also conceptualises how it can take the supplier’s context into account. The first dimension of the model discerns between situations where the supplier is the most important supplier for the specific product or service for the buying firm, and situations where the buying firm has several important suppliers for the same product or service. The second dimension of the model discerns between situations where the buying firm is the most important customer for the supplier, and situations where the supplier has several (equally) important customers (of which the buying firm is one). We use the proposed model to analyse a particular longitudinal case in the construction industry, which focuses on a main contractor that initiates the development of a supply network. The aim of the analysis is to offer an illustration of the different quadrants in the model and discuss effects with regard to three issues: learning, capacity and handling costs. Following this, we examine the use of a portfolio approach in relation to supply network initiatives. Specifically we discuss three managerial challenges; (1) managing with differences, (2) eliminating differences and (3) creating differences. Finally, we draw conclusions and suggest some areas for further research. Keywords: Supplier relationship, supply network, purchasing portfolio models, construction industry

Introduction and purpose

Over the last decades, purchasing has increasingly become supply management (Kraljic, 1983). Firstly, purchasing has become more important because the amount a firm spends on purchased goods and services comprises a larger amount of its turnover. Firms in different industries report that figures of 60-80 percent are not uncommon as firms increasingly focus on their core competences and outsource other activities to suppliers (van Weele, 2000). Secondly, supplier relationships have become more important because companies more often

make use of one or a few suppliers instead of shopping on the market from various suppliers (Gadde and Håkansson, 2001).

This means that within the field of supply management, several management issues have increasingly been attended to. One of these issues is purchasing portfolio models which have received a great deal of attention in the literature the recent years (Caniëls and Gelderman, 2007). From the seminal article by Kraljic in 1983, many researchers have discussed and further developed different type of portfolio models (see e.g. Olsen and Ellram, 1997; Bensaou, 1999; Nellore and Söderquist, 2000; Gelderman and van Weele, 2002). The


general idea is with the help of a portfolio (2x2) matrix to “…optimise the use of capabilities of different suppliers and thereby effectively manage suppliers” (Caniëls and Gelderman, 2007, p. 220).

Another important issue within the field of supply management is how to manage single supplier relationships, and furthermore how to manage supply chains and supply networks (Håkansson and Persson, 2004). So far, single supplier relationships have received much attention, and thus there is quite an amount of knowledge on how such relationships may be handled (see e.g. Håkansson, 1982; Lamming, 1993; Dwyer et al., 1987; Frazier et al., 1988, Gadde and Snehota, 2000; Gadde and Håkansson, 2001). However, the development into managing supply networks has received much less attention. We characterise supply networks as consisting “…of interconnected entities whose primary purpose is the procurement, use, and transformation of resources to provide packages of goods and services” Harland et al. (2001, p. 22). Thus, we have a buying firm as the point of departure which organise a set of suppliers and sub-suppliers into a supply network.

Most of the scarce research within the field of supply networks has so far focused on organisational aspects e.g. the number of suppliers, the number of organisational levels/tiers, and how the network develops over time from the perspective of the buying firm (Gadde and Håkansson, 1994; Dubois et al., 2003; Harland et al., 2004). This is hardly surprising given that supply directs the focus on purchasing issues and thereby the buying firm. However, over the last few years more contributions have paid attention to the supplier’s view on supply networks. We find these contributions interesting since we take a network perspective to supply management and thereby emphasising the importance of the supplier’s context for the buying firm when trying to develop a supply network.

Thus, the purpose of this article is to develop a model for analysing supplier

relationships when developing a supply network. The model takes the buying firm as the point of departure but also conceptualises how it can take the supplier’s context into account. The conceptualisation is based on a case study, which focuses on a main contractor within the construction industry that initiated the development of a supply network.

In the next section, we review literature on purchasing portfolio models with special attention to models which focus on classifying/assessing buyer-supplier relationships. Following that, we look into recent contributions on supply networks seen from both the buying firm’s and supplier’s point of view. At the end of this section we develop a model a buying firm can use for analysing supplier relationships when developing a supply network.

Furthermore, in section 3 we discuss methodology and present an empirical case. The case concerns a main contractor which has initiated the development of a supply network. In section 4 we analyse and discuss how the case firm may benefit from using insights from the suggested model. Finally, in the two last sections we discuss the use of the portfolio approach in relation to supply network initiatives and how this can affect the managerial challenges, and at the end we draw some conclusions and suggest implications for further research. 1. Theoretical basis

The theoretical part of the article first presents and discusses literature on purchasing portfolio models with special attention to models which focus on classifying/assessing buyer-supplier relationships. Following that, we look into recent contributions on supply networks seen from both the buying firm’s and supplier’s point of view. At the end of this section we propose a model a buying firm may use for analysing supplier relationships when developing a supply network. Purchasing portfolio models which focus on classifying buyer-supplier


relationships

In 1983 Peter Kraljic published an article in the Harvard Business Review entitled Purchasing must become supply management, and by doing so he was the first to bring portfolio models into the purchasing area (Gelderman and Van Weele, 2000). Kraljic’s model is based on two dimensions for classifying a firm’s purchased materials or components; (1) the strategic importance of purchasing and (2) the complexity of the supply market. The article received a great deal of attention both from managers and academics, and is still applied in practice and used as a reference by researchers in industrial purchasing.

In later years, a number of academics have further developed Kraljic’s model by classifying buyer-supplier relationships instead of purchasing situations. We shall present a few of these contributions as an inspiration for further discussion on assessing buyer-supplier relationships. One example is Sinclair et al. (1996) who extend Kraljic’s model by introducing the perspectives of both the customers and suppliers. They use the

dimensions (1) Customer’s importance to suppliers and (2) Importance of supplier to customer. According to Doran et al. (2005), who have used this model, the model by Sinclair et al. (1996) stresses in what situations buyers (and sellers) seek closer relationships. In a similar vein, Bensaou (1999) has used the dimensions (1) Buyer’s specific investments and (2) Supplier’s specific investments in his portfolio model, and thereby reaching a relationship classification similar to Sinclair et al. (1996). Furthermore, Gelderman and van Weele (2000) have used the power-dependence between the buyer and the supplier to differentiate between different types of relationships (or exchanges). Based to this classification they have developed different supply strategies. For an overview of these contributions see table 1. For a review of some of the latest developments in purchasing portfolio models, see Dubois and Pedersen (2002) and Persson and Håkansson (2007).

The similarities between the models is that they use the buyer-supplier relationship as the point of departure for the classification and thereby focus on both the buyer’s and the suppliers’ perspectives. In

Table 1 Different portfolio models focusing on buyer-supplier relationship Portfolio model Classification dimensions Classifying what? Sinclair et al. (1996) - Customer’s importance to

suppliers - Importance of supplier to customer

Business relationships - Market Exchange - Dependence Leverage - Dependence Management - Strategic Partnership

Bensaou (1999) - Buyer’s specific investments - Supplier’s specific investments

Relationships - Market Exchange - Captive Buyer - Captive Supplier - Strategic Partnership

Gelderman and Van Weele (2000)

- Supplier’s dependence - Buyer’s dependence

Supply strategies - Efficient processing - Exploit power - Volume insurance - Balanced relationship


our view these models, with Kraljic’s model as the point of departure, have become popular and widespread partly because they are fairly easy to communicate and understand, and partly because they give practical guidelines for how to manage different buyer-supplier relationships/situations. This is also highlighted by Gelderman and Van Weele (2002, p. 35) who claim that the models building on Kraljic’s model “… seems to be an effective tool for discussing, visualizing, and illustrating the possibilities of differentiated purchasing and supplier strategies”. In the follow part we shall turn our attention to the concept of supply network. Supply network

In an article by Mills et al. (2004) they conduct an extensive review of strategic supply network literature. The authors claim that supply network management is a rapidly expanding field with a fast growing amount of literature. In a similar vein, and based on a literature review of both purchasing and ‘non-purchasing’ journals, Holmen et al. (2007, p. 180) identify and discuss three important issues in supply network management. These issues are:

1) interconnected relationships, i.e.

creating relationships among suppliers in the supply network (which also incorporate the nature of the relationships)

2) the structure of supply networks 3) the process of initiating, creating,

managing and/or changing a supply network.

In the following, we will use these

three issues to structure the presentation and discussion.

If we start with the issue of interconnected relationships many of the contributors within the field of supply networks have touched upon this

characteristic. Harland et al. (2004, p. 2) consider how a supply network can be delimited in space and argue that “… we could examine the total supply network for a firm that could be represented by the set of upstream and downstream organizations it deals with, either directly or indirectly, from original source of raw material or service creation, to ultimate end customer. This would provide a map of all relationships within that firm’s supply network”. Dubois and Gadde (2000) also argue that an important issue of supply networks is that collaboration not only takes place between a buying firm and its suppliers, but also among the suppliers thus creating connected relationships. In a similar vein, Andersen and Christensen (2005, p. 1261) claim that “…supply networks are characterized by sets of purposeful and connected exchange relationships”. This is supported by Håkansson and Persson (2004) who discuss different types of interdependencies in supply networks.

The second issue is how the structure of supply networks can be characterised and classified. In Lamming et al. (2000) and Harland et al. (2001) a model for classifying supply networks based on two dimensions is presented; (1) the degree of supply network dynamics and (2) the degree of focal firm supply network influence. Based on these two dimensions the authors develop a 2x2 matrix and discuss four supply network types. Mills et al. (2004, p. 1023) also discusses structural elements of supply network and claim that the static network perspective of a focal firm’s whole supply network is important “…in order to compare performance in its multiple supply chains…”. Furthermore, they emphasise the firm’s position in the network and how the position can be improved without changing the structure of the supply network. Related to position in supply networks, Knight and Harland (2005) discuss organisational roles in supply network management and, based on empirical research and the use of role theory, they identify six different roles that firms can have in supply networks.


Håkansson and Persson (2004) also focus on structural issues as they discuss interdependencies in supply network, on the basis of Thompson’s concepts of sequential, pooled and reciprocal interdependencies. They claim that one major issue in relation to supply networks is “… the fact that any focal organization is normally part of several supply chains, each of them representing different entities, which may or may not be in conflict as far as optimization and integration is concerned. This issue in fact is related to the exploitation of pooled interdependencies” (Håkansson and Persson, 2004, p. 18).

A third issue, which over the latter years has become more prevalent in the literature, is the process of initiating, creating, managing and/or changing a supply network over time. This is also pointed out by Mills et al. (2004) who divide what they call the dynamic network perspective into (a) the evolution of existing supply chains and (b) the creation of new supply chains. One stream of research within this area is carried out at the Centre for Research in Strategic Purchasing and Supply (CRiSPS) at University of Bath, see e.g. Harland (1996), Johnsen et al. (2000), and Harland et al. (2004). They have particularly focused on (a) the creation and operation of supply networks and (b) strategies related to how to manage these supply networks over time. A more logistics-oriented approach is taken by Hines et al. (1998) who present and discuss a lean logistics approach to design a programme to develop a supply network. Romano (2003) also takes a logistical point of departure and discusses co-ordination and integration mechanisms to manage logistics processes across supply networks. He develops a conceptual framework containing three elements and concludes that the process has lead to intensified interaction and communication both at a dyadic level, but also at an overall supply network level. In another stream of research we find Dyer (2000) and Dyer and Nobeoka (2000) who have studied and conceptualised the knowledge management

processes in Toyota’s supply networks. In relation to that they describe the evolution of the network in three phases: First, the development of weak ties between the buyer and the different suppliers in the network. They use the term ‘weak’ to point out that the relationships were new and the frequency and intensity of the interaction was low. Second, the development of strong ties between the buyer and the suppliers, where Toyota transferred know-how of, for example, production technologies. Third, the development of strong ties among the suppliers, enabling the suppliers to create sub-networks within the full network to maximise willingness to share information and knowledge.

The discussions so far about supply network has been from the buying firm point of view, e.g. how a core buyer may manage and organise its suppliers in networks, and thus, not many studies have taken the suppliers’ interests into account. The suppliers are rarely viewed as actors with their own plans and visions, and seldom are the alternative relations available to the suppliers discussed or handled. Lately a few contributions have pointed out that fact that there is less focus on the supplier perspective of supply networks (Mills et al., 2004; Stjernström and Bengtsson, 2004; Andersen and Christensen, 2005). For example Stjernström and Bengtsson (2004, p. 137) claim that “one shortcoming, however, is that most of the literature is based on buyer perspective, while studies made from the supplier perspective are rather few”. However, there are a few examples of contributions which have taken the suppliers’ view of supply networks as the point of departure. We shall present and discuss some of these contributions because we are interested in the network view of supply network and thus more knowledge about the supplier side is needed.

Some contributions focus on situations where it is only one buyer or a dominant buyer. One early contribution is Lilliecreutz (1998) who takes into account how a buying firm’s restructuring of its


supply base affects the suppliers, and how a buying firm can synchronise its strategy with the strategies of its suppliers. He claims that suppliers need to develop their own strategies as a consequence of buying firms’ growing interest in restructuring, rationalising and developing their supply base/network. Lilliecreutz (1998) concludes that the suppliers’ ability to orchestrate their resource base, role and position is of great importance. In a similar vein, Calabrese (2000) studied 25 small and medium sized suppliers and looked into the strategies they adopted in order to handle changes initiated by the manufacturers (the buying firms), for example reorganisation of the supply base/network. Finally, Johnsen and Ford (2005, p. 184) look at how suppliers react to two different sets of strategies applied by a buying firm. The first strategy is ‘network intervention’, i.e. that the buying firm is actively involved itself in indirect relationships. The second strategy is ‘network delegation’, i.e. that the buying firm instructs another actor to disseminate or forward the buying firm’s preferences. Based on a case study they conclude that it in some situations was difficult for the suppliers to carry out their own strategies because they were constrained by the buying firm. What is typical about these contributions is that they focus on situations (or structures) where it is only one buyer (or a dominant buyer). This implies that all changes, strategies etc. are related to the initiatives taken by a single, often dominant buyer in a supply network.

Some other contributions have focused on the suppliers’ situation in multiple supply networks. One example is Stjernström and Bengtsson (2004) who discuss suppliers’ contributions to customers’ product and process development in multiple supply networks. By contributions they mean (a) new product development, (b) new product manufacturability, (c) efficient manufacturing processes and (d) the general development of the supply chain/network. Stjernström and Bengtsson (2004) have studied six suppliers who have overlapping customers,

and the three different customers had different views on the fact that their suppliers delivered to a competitor. While the suppliers believed that delivering to different, competing customers would lead to faster technological development and more learning, one of the customers stipulated in the contract that the suppliers should not to deal with the competitors (of the specific customer). Andersen and Christensen (2005) also discuss different supply network structures and look at the positions and roles of individual suppliers in such structures. Based on different illustrative cases they present a typology with five different bridging roles subcontractors (suppliers) can have in international supply networks. They are: (a) the local integrator, (b) the export base, (c) the import base, (d) the international spanner and (e) the global integrator. Andersen and Christensen (2005) identify some of the same issues related to how to handle situations with multiple buyers who individually may initiate new supply network strategies.

Based on the literature review above we conclude that it is important to pay attention to the context both of the buying firm and of the suppliers which form part of such supply networks. In the following section, we shall use parts of the different models we have introduced and discussed in the theoretical basis to generate a model for analysing supplier relationships a buying firm may use to develop a supply network.

Towards a model for analysing supplier relationships when developing a supply network

So far, the article has reviewed

literature within two fields of supply management. First, purchasing portfolio models with a special focus on classifying/assessing buyer-supplier relationships and second, the supply network seen from both the buying and the supplying firm’s perspective. As mentioned earlier, this article focuses on how a buying firm (the customer) can take the supplier’s


perspective and the supplier’s context into account when developing a supply network. Following this logic, we suggest the following model for analysing supplier relationships:

The first dimension of the model is related to the buying firm’s type of relationship to the potential suppliers in the supply network. We separate between situations where the supplier is the most important supplier for the specific product or service, and situations where the buying firm has several important suppliers for the same product/service. In both situations the two firms may have established a close relationship and, as a consequence, have cooperated and made mutual adaptations in the past, as well as developed a considerable amount of trust towards, and knowledge about, each other. The difference between the two situations concerns to what extent the buying firm has divided its attention among a number of different suppliers (dual sourcing) or focuses on one important supplier (single

sourcing). The second dimension of the model

is related to the supplier’s type of relationship to the buying firm and its other customers. We separate between situations where the buying firm is the most important customer for the supplier, and situations where the supplier has several (equally) important customers (of which the buying firm is one). Also in these two situations the two firms may have established a close relationship and, as a consequence, have cooperated and made mutual adaptations in the past, as well as developed a considerable amount of trust towards, and information about, each other. The difference between the two situations concerns to what extent the supplier is involved with a number of other important customers or focuses on one important customer (the buying firm).

By combining these two dimensions, we can construct a model which is illustrated in Figure 1.

Based on the two dimensions we get Figure 1 Model for analysing supplier relationships a buying firm can use when developing a supply network

Buying firm’s context

II Dual sourcing

I Dual sourcing and providing

IV Single sourcing and providing

III Dual providing

Supplier’s context

Buying firm most important customer

Buying firm one of several important customers

Supplier most important supplier

Supplier one of several important suppliers


the following four quadrants: Quadrant I – Dual sourcing and providing: In this quadrant both the buying firm and the supplier have relationships to other important suppliers/customers. This implies that that buying firm uses a handful of different suppliers for the same product or service, and thus needs to divide its attention between the different suppliers. The supplier has a few other important customers besides the buying firm, which also may or may not have different types of supply network initiatives or supplier development programmes. Thus, the supplier also has to share its attention between different customers. Quadrant II – Dual sourcing: In this quadrant the buying firm is the most important customer for the supplier but the buying firm has relationships to several other important suppliers. This implies that the supplier is very much focused on the request, needs and routines of the buying firm to be able to serve its most important customer in the best possible way. The buying firm, on the other hand, uses several different suppliers for the same product or service, and thus needs to divide its attention between the different suppliers. Quadrant III – Dual providing: In this quadrant the supplier is the most important supplier for the buying firm but the supplier has relationships to several other important customers. This implies that the buying firm is dependent on the supplier and is working to get the most out of the supplier relationship and become prioritised by the supplier. The supplier, on the other hand, has several other important customers besides the buying firm, and thus, the supplier has to share its attention between different customers. Quadrant IV – Single sourcing and providing: In this quadrant both the buying firm and the supplier is the most important counterpart for each other (in relation to a specific product area or service). This

implies that the buying firm is dependent on the supplier and is working to get the most out of the supplier relationship when it comes to adaptations etc. The supplier is in the same situation and is focused on the needs and routines of the buying firm to be able to serve its most important customer in the best possible way.

In the following section we shall look into and discuss three important issues we may use to evaluate positive and negative effects in the four different quadrants of the proposed model. The first issue is learning which has been an important issue in the supply network review above, especially in the discussion of initiating a supply network. The second issue is capacity which is touched upon in the discussion of how the suppliers may react to customers’ supply network initiatives. The third issue concerns handling costs which are related to the number of suppliers and tiers and the different roles in the supply network, as discussed in the part of the supply network review focusing on structural issues.

The first issue is learning across relationships, which has been addressed by several authors. Among those we find Nobeoka et al. (2002) who discuss the influence of customer scope on supplier learning and performance in the Japanese automobile industry. They suggest that the extent of learning as well as the performance of a supplier is strongly related to the number and type of customers with whom it cultivates highly cooperative relationships. Nobeoka et al. (2002) distinguish between relationship-specific knowledge vs. re-deployable knowledge and argue that in order for knowledge to be re-deployable across different customer relationships, the customers must have ‘related needs’, e.g. by all being large automotive assemblers. Based on these premises, Nobeoka et al. (2002) propose that a supplier who engages in a small set of relationships to customers with related needs and, furthermore, is able to transfer re-deployable knowledge across these relationships will not only learn more but


also perform better. The authors stress the importance of focusing their attention on a small set of relationships to customers with related needs because “too many result in a lack of information sharing and investment and in high administrative costs” (Nobeoka et al. 2002, p.731). Somewhat similar conclusions have been reached by MacDuffie and Helper (1997) who have studied Honda’s supplier development practices in the automotive industry. They suggest that an important issue for the buying firm as well as for the supplier in a relationship is to consider the potential complementarities between the focal relationship and the supplier’s other customer relationships. On the one hand, the supplier may benefit from understanding “which skills will be taught and how applicable they will be to other customers” (MacDuffie and Helper, 1997, p.144) thereby trying to assess whether or not the practices it is to learn in one supplier development initiative will be complementary to and useful for what the supplier learns and does in its other customer relationships. On the other hand, the buying firm may benefit from considering that helping a supplier to achieve consistency across all its operations and all its customers can be an important component of a buying firm’s strategy towards its suppliers.

The second issue is related to capacity. It is argued by Dubois and Fredriksson (2008) that in addition to the learning issue, the efficiency/volume issue is important when selecting a sourcing strategy (and thereby the type of supplier). This implies that how the supplier’s production capacity is divided between different important customers is crucial for a buying firm. Håkansson and Persson (2004) argue using the different interdependences identified by Thompson, that pooled interdependence is important because pooled interdependence between two activities means that they share a common resource. When selecting a supplier for a supply network the buying firm should take into account that the production capacity of

the supplier is a ‘common resource’ that are shared between the different customers of that particular supplier. The stress of responding to several major customers with different priorities was also studied by MacDuffie and Helper (1997, p. 143), who stated the following: “Don’t worry about knowledge spillover to competitors through a shared supplier. Do worry about the impact of multiple customers on a supplier’s responsiveness”, in terms of taking up too many of the supplier’s managerial resources and other forms of capacity.

The third issue is handling costs both regarding specific suppliers as well as the overall supply/purchasing related costs. Gadde and Håkansson (1993), in their discussion of indirect costs in purchasing, discuss handling cost as one important factor. They claim that these costs are both related to specific buyer-supplier relationships as well as costs generated in the purchasing process by handling documents, invoices etc. Gadde and Snehota (2000) divide these handling costs into ‘relationships handling costs’ and ‘supply handling cost’. According to Gadde and Snehota (2000) handling cost is one of the important type of costs to consider when deciding to either have one or a few suppliers for each product or service and to work in high-involvement relationships or using multiple sourcing and work in low-involvement relationships. The handling costs are assumed to increase with the use of a multiple sourcing strategy. This is also discussed by Dubois (2003) who claims that the number of suppliers a buying firm use (for a specific product or service) have a direct impact on the handling costs, but also have a indirect effect on a lot of other cost drivers (e.g. number of invoices). In the following sections of this article we present and discuss a processual case study of a main contractor within the construction industry who has tried to develop a supply network, together with its technical subcontractors, across a large number of construction projects carried out over a number of years.


2. Methodology and empirical basis

The case in this article is based on a long-term processual case study, which is real-time, theory-led, and contextual. The focal firm in the study is a large main contractor. Most studies of supply network management focus on firms in various manufacturing industries, often automotive (see Kinder, 2003 and Stjernström and Bengtsson, 2004). Thereby, this study adds to our awareness of how supply networks can be developed (and managed) in other industries, e.g. the construction industry.

The empirical material for the case study was gathered in real-time, over a period of almost ten years, and multiple sources of information were used. For example, we have:

- taken part in the main contractor’s

supply network project - carried out approx 40 semi-

structured, personal interviews with people from the contractor as well as the subcontractors (suppliers),

- taken part in various internal seminars, workshops and field trips (to construction sites),

- read various company documents, and

- supervised a number of (master) students writing their theses with the contractor as the core firm.

Empirically, we have followed a

large main contractor in its efforts at reorganising and reducing the supply base of the firm and structuring part of the base as a supply network. This process started in 1997 and we have followed the firm in the period 1997-2007. For a more thorough description of the case, see Holmen, Håkansson and Pedersen (2003) and Holmen, Pedersen and Jansen (2007).

We have divided our longitudinal data into the following four periods:

1. before 1998, when the first supply

network initiative started

2. during 1998-1999, when the first supply network initiative was carried out

3. during 2000-2005, after the first supply network initiative

4. 2005-, during the second supply network initiative

In the first period, before the first

supply network initiative started, the main contractor mainly used competitive bidding in relation to its suppliers and subcontractors, which were quite numerous in number. However, being increasingly dissatisfied with this approach, the main contractor decided to change its approach towards some of its suppliers. In order to change its approach, the main contractor organised its efforts by means of a sourcing project with the aim to design a supply network within the Building Division of the firm. The project was called; ‘Network with technical subcontractors’, and the supply network consisted of subcontractors of three types of technical services: Electrical services, Ventilation services and Plumbing services. The aim of the project was ”…to develop a method for choosing and organising co-operation partners which will enable the firm to achieve competitive advantages. This should enable the firm to become better at: (1) choosing ’optimal’ technical solutions for their customers, (2) handling interfaces among technical subcontracts and (3) utilising advantages stemming from co-operative relationships.”

In this second period, the firm classified all the suppliers (the supply base) of one chosen business unit in the Building Division into a catalogue called ‘the Supplier Library’ where all the business unit’s current preferred suppliers were classified according to the materials they produced and/or the service they delivered, for example timber frames, steel, plumbing services etc. Since the sourcing project mainly focused on designing a supply network of technical subcontractors, the subcontractor subset of the supply base was singled out, i.e. suppliers delivering Electrical services, Ventilation services and


Plumbing services. In total, nine suppliers were selected, three for each type of technical subcontract. The supply network was to be tried out in a number of actual construction projects through which it was assumed that the supply network would develop substance within single relationships as well as connections between relationships (creating a network). In these projects the subcontractors were divided in different constellations which were to work together as ‘sub-networks’ with electricians, plumbers and ventilation installers.

Through this process (beginning of 1998 to end of 1999), the way in which the business unit related to its technical subcontractors changed dramatically. For example, the purchase of electrical services from the three chosen technical subcontractors tripled during this period (without any major change in turnover). Out of the business unit’s total purchase of technical services in 1999, approximately 95 % were from the designed supply network.

In the third period, between 2000-2005, some of the subcontractors from the original supply network project were gradually used less and some relationships even ended. Other subcontractors became more important in the years after the supply network project, and still others started to be used after 2000.

In 2005, the main contractor wanted to establish mechanisms which could facilitate joint learning and mutual adaptations among the firm’s most important technical subcontractors, and among these technical subcontractors. In particular, the main contractor wanted to establish a small network of technical subcontractors which could ‘train as a team’ across a number of construction projects which would function as pilot arenas for the collaborative efforts. Therefore, in the fourth period, the main contractor started a new process of mapping their present technical subcontractors in order to identify suitable candidates for the initiative. Among the important features of the relationships, the main contractor stressed that the technical

subcontractors should have worked with firm for several years, that the collaboration had been satisfactory, and that there were good personal relations among the individuals from the different firms which were most heavily involved in the relationships to the main contractor.

Having singled-out 5-6 technical subcontractors, the main contractor ‘invited themselves to visit the respective subcontractors, on the premises of the subcontractors.’ In beforehand of the meetings, the main contractor had asked each of the subcontractors to make a presentation of their firm which would enable the main contractor to assess whether the subcontractor had the intention as well as the ability to partake in efforts aimed at joint, continuous improvement and learning. Based on these meetings, the main contractor chose three subcontractors – covering the respective areas of plumbing, ventilation, and electrical services. After the selection, the supply network initiative has developed over a number of construction projects used as pilots for the initiative, and recurrent meetings, workshops as well as theme groups - all with representatives from different levels at the various firms – have been carried out in order to generate learning as well as to systematise and/or transfer it among the network participants.

The changes over time are shown in Table 2.

3. Analysis

In this section we use the proposed model for analysing supplier relationships developed in section 2, to provide an illustration of the different quadrants and discuss effects with regard to the three issues: learning, capacity and handling costs. Even though we have discussed the three issues theoretically both in relation to a buying firm (a customer) and its suppliers, we shall focus the analysis only on the buying firm’s perspective since it is the buying firm who initiates a supply network and thereby analyses its supplier relationships.


Table 2 Technical subcontractors used by the main contractor, 1997-2007

Sub-contractor

Used in the years before the supply network (SN) initiative started in 1997

Used during the supply network initiative in 1998-99

Used in the period 2000-2005

New supply network initiative (2005-)

Subcon 1 Yes Yes. Part of SN No. The subcon. changed its strategy.

Subcon 2 Yes Yes. Part of SN Yes, but only on smaller projects.

Subcon 3 Yes Yes. Part of SN Merged in 2000. Used quite little in this period.

Subcon 4 Yes No. Part of SN

Subcon 5 Yes Yes. Part of SN Merged with subcon. 13 and 14 in 2000.Not used after 2000.

Subcon 6 Yes Yes. Part of SN Yes Yes (plumbing) Subcon 7 Yes Yes. Part of SN Yes

Subcon 8 Yes Yes. Part of the period. The firm had financial problems and left the SN.

No

Subcon 9 No No

Yes. The subcon. started to be used because the main contractor needed more subcontractors of electrical services.

Subcon 10 No No Yes. Some former employees of subcon. 5 became owners of this subcontractor. These persons have been the main contractor’s key co-operation partners.

Yes (ventilation)

Subcon 11 Yes Yes, became partly part of the SN.

Yes. The subcon. started to be used because the main contractor had too few plumbing subcontractors.

Subcon 12 Yes Yes, but not part of the SN.

Yes. Much used today and an important partner.

Subcon 13 No Yes, but not part of the SN.

Yes. More used after the merger (with subcon. 5 and 14).

Subcon 14 No No Yes. Stated to be used after the merger (with subcon. 5 and 13)

Subcon 15 No No Yes. Important partner today.

Yes (electrical)


Quadrant I - Dual sourcing and providing Empirical illustration

During the first supply network initiative (1998-1999) the main contractor developed a close relationship with the plumbing subcontractor. The main contractor had bought a lot of services from this subcontractor (but always based on tendering procedures) over the years before the supply network initiative started. During the initiative, the relationship strengthened and new routines were developed. Furthermore, potential new co-ordination mechanisms at the construction site were analysed and implemented. However, the main contractor also frequently uses three-four other subcontractors within the field of plumbing. One of these (subcon 7) took part in the supply network initiatives together with the plumbing subcontractor in focus, and thus also has a long term relationship with the main contractor. The two-three other plumbing subcontractors that are widely used today started the cooperation with the main contractor in the late 90ties. Thus, the plumbing subcontractor in the New supply network initiative is one of several important subcontractors in the field of plumbing for the main contractor.

The plumbing subcontractor also has a few other important customers than the main contractor within the construction industry. The subcontractor has reduced its number of important customers since the New supply network initiative started in 2005, but still the main contractor is one among two-three important customers of the plumbing subcontractor. Two of these other customers are large construction firms and one has a very different supply strategy than the main contractor (with a focus on competitive biding) and the other has more a collaborative strategy towards suppliers, and is known for working with a new collaborative method on a very large and prestigious project. Analysis

In the following section we shall look

at the advantages and disadvantages for the main contractor with regard to the three main issues introduced above: Learning: The main contractor can learn from the plumbing subcontractor with regard to ways of working together. Since the plumbing subcontractor has been quite heavily involved in a large project with another main contractor who has developed collaborative strategies with its suppliers, it is possible for the subcontractor to transfer some of these routines into the New supply network initiative. Thus, what the main contractor can learn in this situation in not about plumbing but ways of working in close relationships as well as coordination methods for the construction site. Capacity: The main contractor is one of several customers which the plumbing subcontractor has to divide its production capacity among. This implies that the subcontractor often is occupied with other large projects and do not have the sufficient production capacity for the main contractor. This sometimes creates tensions in the relationship as the main contractor experiences delays from the plumbing subcontractor. Thus, in this situation the main contractor does not get top priority from the plumbing subcontractor, and thereby the production capacity is not that reliable. Handling costs: The main contractor experiences some relationship handling costs since it has to develop and maintain the relationship with several plumbing subcontractors. This also increases the cost of handling invoices, technical drawings etc. from the different plumbing subcontractors. Thus, in this situation the main contractor needs to work with several subcontractors and thereby the total handling costs will rise. Quadrant II - Dual sourcing Empirical illustration

The electrical subcontractor has


delivered services to the main contractor for 15-20 years (based on tendering procedures), but the more substation relationship started around the year 2000. In the period from 2000 to 2005 the main contractor has used the electrical subcontractor more and more frequently, and the two firms have developed a closer relationship over the last years. Since the electrical subcontractor had not taken part in the supply network initiative (1998-1999) the main contractor still works quite a lot with four-five other subcontractors for electrical services. Two of these subcontractors are somewhat smaller than the electrical subcontractor in focus, but the other three subcontractors are to a large extent, large competitors (of the focal electrical subcontractor).

After entering the New supply network initiative, the electrical subcontractor, on the other hand, has directed much of its activities and resources towards the main contractor. The electrical subcontractor does not have any other large customers within the construction industry and thus the main contractor has become the most important customer. Analysis

In the following section we shall look at the advantages and disadvantages for the main contractor with regard to the three main issues introduced above: Learning: It is more difficult for the main contractor to learn from the electrical subcontractor (than the plumbing subcontractor) since the subcontractor has very few other large customers. As it is not a question of learning about electrical issues, but instead working methods, coordination forms and routines the subcontractor has few others to learn from than the main contractor. Thus, the learning opportunities are minor when it comes to transferring knowledge. Capacity: The electrical subcontractor has devoted most of its production capacity to the main contractor. Often the main

contractor takes 100% of the subcontractor’s total capacity, and sometimes the subcontractor also hires extra manpower to make sure they can fulfil a contract with the main contractor on time. Thus, in this situation the main contractor is highly prioritised by the electrical subcontractor, and thereby the production capacity is reliable. Handling costs: The main contractor experiences some relationship handling costs since it has to develop and maintain the relationship with several electrical subcontractors. Even though the number of different electrical subcontractors is smaller than for plumbing subcontractors, the main contractor still has to divide its attention between a few different electrical subcontractors. Thus, the main contractor will experience that the relationship handling costs will be high. Quadrant III – Dual providing Empirical illustration

When the New supply network initiative started in 2005 the main contractor changed its strategy and decided to gradually develop the three subcontractors into the most important supplier for each of the three technical areas, but as we have discussed above this has not yet happened for the plumbing and electrical areas. However, the ventilation subcontractor gradually has become the main contractor’s most important supplier of ventilation services. If we look at the development related to the ventilation subcontractor, the relationship started in 2000, as a result of a merger. In the period from 2000 to 2005 the main contractor has used the subcontractor more and more frequently, and the two firms have developed a closer relationship.

The ventilation subcontractor on the other hand is heavily involved with several other important customers in the construction industry as well as in other industries, and the ventilation subcontractor is the ‘preferred supplier’ for one of these other customers. Most of these other


customers are competitors of the main contractor within the construction industry. One of these customers is the same as the firm mentioned above (for the plumbing subcontractor) which has a collaborative strategy towards suppliers, and is known for working with a new collaborative method on a very large and prestigious project. The other two customers within the construction industry are large national and international main contractors. Analysis

In the following section we shall look at the advantages and disadvantages for the main contractor with regard to the three main issues introduced above: Learning: The main contractor can learn from the ventilation subcontractor with regard to ways of working together. Since the ventilation subcontractor has been heavily involved in a large project with another main contractor who has developed collaborative strategies with its suppliers, it is possible for the subcontractor to transfer some of these routines to the New supply network initiative. The ventilation subcontractor also has a few smaller main contractors who it has developed beneficial working routines with. Thus, in this situation the main contractor can use the learning opportunities. Capacity: The main contractor is one of several customers which the ventilation subcontractor has to divide its production capacity among. This implies that the subcontractor often is occupied with other large (and small) projects and do not have sufficient production capacity for the main contractor. This sometimes creates tensions in the relationship as the main contractor experiences some delays from the ventilation subcontractor. Thus, in this situation the main contractor does not have top priority from the ventilation subcontractor, and thereby the production capacity is not that reliable. Handling costs: The main contractor will

experience lower relationship handling costs compared to the relationship with the plumbing and the electrical subcontractors, since it has to develop and maintain the relationship with primarily one ventilation subcontractor. Thus, in this situation the main contractor will work in a high-involvement relationship with the ventilation subcontractor and thereby the relationships handling costs will fall. Quadrant IV - Single sourcing and providing Empirical illustration

Even though the main contractor has worked with all three subcontractors, which are part of the New supply network initiative, over a long period of time (approx. 7-15 years), none of the relationships have developed into single relationships.

Using the proposed model the analysis can by summed up in the illustration in Figure 2. 4. Discussion

In this article, we have suggested a model (inspired by a portfolio approach) for analysing and categorising a main contractor’s relationships to three suppliers who are part of a supply network initiative introduced by a main contractor. By using this model, the three suppliers were placed in different categories/quadrants. We also identified different advantages and challenges related to the three different categories and, hence, to the three different suppliers.

From a portfolio perspective, it can seem beneficial to have suppliers in different categories since this enables the main contractor to achieve all types of benefits (but also all types of disadvantages) of the different types of relationships. For example, it may be beneficial to have some relationships in which one primarily learns from the supplier due to it having multiple relationships to related customers, and some relationships in which one primarily teaches the supplier.


Figure 2 Analysing the case using the proposed model

If we follow the logic of many

portfolio models, e.g. the one suggested by Kraljic (1983), the managerial consequence would be to have differentiated approaches to the differently-categorised suppliers. In our case, the main contractor initiates a supply network initiative in which the three suppliers are treated in the same manner, i.e. a non-differentiated approach. Furthermore, not only are the suppliers each treated in a similar manner (applying a similar approach to different supplier relationships), they are also directly grouped together by the main contractor (similar approach to a network of suppliers). An interesting issue then becomes to what extent such an approach offers advantages, or creates problems, for the main contractor’s supply network. We suggest that different managerial challenges may arise in such a network.

One such managerial challenge relates to managing (with) differences among suppliers in the network initiative, thus preserving the heterogeneity among them. Firstly, if some suppliers always take more of a teaching role towards the main

contractor, whereas other suppliers never do so, this may create problems and tension among the suppliers. It may require the main contractor to point out that the suppliers are equally important regardless of their different learning-related roles and inputs; alternatively that the main contractor explicitly assigns different roles to suppliers belonging to different categories. For example, a supplier with a learning-role may first be asked to adopt a new routine developed by the main contractor, and if benefits can be shown to result from this test, suppliers with a teaching-role may subsequently be asked to adopt the routines. Secondly, if there are never capacity problems related to some suppliers but frequent capacity problems related to other suppliers, this may create problems among the suppliers in case of sequential or reciprocal interdependencies among their activities. It may also create problems for the main contractor who needs to find ways of handling such differences, possibly developing penalties which are accepted among the supply network members, or developing a system of differentiated

Buying firm’s context

II Dual sourcing Electrical subcon Learning: - Capacity: + Handling costs: -

Han Supplier’s

context

Buying firm most important customer

Buying firm one of several important customers

Supplier most important supplier

Supplier one of several important suppliers

I Dual sourcing and providing Plumbing subcon Learning: + Capacity: - Handling costs: -

IV Single sourcing and providing

III Dual providing Ventilation subcon Learning: + Capacity: - Handling costs: +

Han


penalties implying that it is accepted that some suppliers are allowed to cause delays while others are not. We may also note that differences may not only create negative effects but also positive ones, for example when one supplier is able to teach another supplier without much intervention and effort from the main contractor. We may also observe that ‘managing with differences’ may require the main contractor to make separate, supplementary efforts towards some suppliers in addition to the similar efforts within the supply network initiative.

Another managerial challenge may be related to eliminating differences among suppliers in the network initiative, thus creating some homogeneity among them. Whereas the suppliers may be placed in different categories at the outset of a network initiative, one purpose of such an initiative may be to make the suppliers become more similar, over time cancelling-out the differences among the suppliers in the different categories. For example, the main contractor may view the initiative partly as a ‘supplier development’ initiative aimed at upgrading and aligning the capabilities of the suppliers in certain dimensions, or requiring of the suppliers that they make changes in or of their other relationships. Furthermore, by encouraging the suppliers to work together as a team over a large number of projects, the main contractor may rely on the suppliers becoming more alike through socialization and by making other types of adaptations among them. However, similarly to the arguments above, we may also note that eliminating differences among suppliers in a network initiative may not only create positive effects but also negative ones, for example if group-think, fixed routines, and reduced creativity occur. This, in turn, may lead to a third managerial challenge, i.e. generating differences among suppliers in a network initiative, thus creating some heterogeneity. We may also observe that eliminating (as well as creating) differences may require the main contractor to make separate, supplementary efforts towards some suppliers in addition to the common efforts within the network

initiative. While the three types of challenges

– managing differences, eliminating differences, and creating differences – are theoretically distinct, they may coexist empirically, in the sense that a main contractor may focus on managing with differences in some dimensions while, at the same time, eliminating differences in other dimensions, and creating differences in yet other dimensions. Furthermore, while eliminating or creating differences requires the passing of time, and hence touches upon the handling of dynamics in a network initiative, managing (with) differences can be an approach both for the short-term as well as for the long-term. In addition, we may also mention a fourth approach – ignoring differences – which may be quite widespread approach, since it is impossible and possibly unproductive to deal with all types of differences, even if one might be aware of them. 5. Conclusions and implications

In general, portfolio models are tools for simplifying analyses of complex processes and/or situations. By using 2x2 matrices, we can focus the analysis on a limited number of factors which may be important in the four different situations. In addition, 2x2 matrices serve as a way of presenting strategies for how to act. In this article we have proposed a model for analysing supplier relationships when developing a supply network, showing how a buying firm may consider the supplier’s perspective and the supplier’s context. The first dimension of the model separates between situations where the supplier is the most important supplier for the specific product or service for the buying firm, and situations where the buying firm has several important suppliers for the same product or service. The second dimension of the model separates between situations where the buying firm is the most important customer of the supplier, and situations where the supplier has several (equally) important customers (of which the buying firm is one).


We use the model to analyse three issues; learning, capacity and handling costs, as outlined earlier. All three issues help to emphasis differences in the situations described in the model, and together they create a set of unique opportunities and drawbacks linked to each quadrant in the model. We do not, however, claim that these three issues are the only relevant ones which could have been analysed. For example, R&D costs and economies of scale and scope could be other relevant issues which can be analysed using the same type of models.

By offering an illustration of the different quadrants of the proposed model, we have demonstrated in the analysis section that the chosen issues have an impact on the dimensions presented in the model. The proposed model represents a simplification of the real situation of the case firms. Thus, we claim that a buying firm may benefit from analysing the supplier relationships with regards to the dimensions outlined in the model, for example before a new supply network initiative is introduced. The model can help the buying firm by giving an overview of the status quo before starting a new initiative, and thus help understanding how the buying firm can emphasise different aspects in order to succeed with the network initiative. We are aware that there might be an information problem for a buying firm in relation to finding out its suppliers’ degree of involvement with other main customers. Handling this requires a close relationship with the suppliers in question, and it can be resource-intensive to acquire this type of information. However, the case study shows that it is possible for a buying firm to gain insight into the important customers of its main suppliers. Such knowledge may be vital to a firm which would like to develop and manage a supply network.

There are two areas which we have not focused on in the article, but which we would like to suggest for further research. The first suggestion is to use the proposed model (and other portfolio models) to analyse and monitor changes over time in a

supply network. By analysing the situation at different points in time, the buying firm may look at changes in the structure which can be met by a shift in the way in which the buying firm attempts to develop the relationships. If, for example, a supplier has moved from quadrant I to quadrant III over a period of two years, it may be necessary to rethink and adjust how this relationship is managed. The portfolio model can thus be used to alert the buying firm to changes, and enable the buying firm to suggest new strategies to dealing with the changes.

The second suggestion is to develop the model into also covering the suppliers’ situation and their view on their customers’ supply network initiatives. As mentioned above, portfolio models can serve both as analytic tools and as presentation tools, and using the model as a basis for discussion between the buying firm and the suppliers will be an example of using the model as a presentation tool. This would also facilitate a possibility to discuss the suppliers’ view of their possibilities for learning, for handling capacity issues, and for influencing handling costs.

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