Manufacturer price reduction pressure and supplier … · Manufacturer price reduction pressure and supplier relations John W. Henke Jr, Ravi Parameswaran and R. Mohan Pisharodi School

Manufacturer price reduction pressure andsupplier relations

John W. Henke Jr, Ravi Parameswaran and R. Mohan Pisharodi

School of Business Administration, Oakland University, Rochester, Michigan, USA

AbstractPurpose – Manufacturer price reduction pressure on suppliers is an important contributor to helping a manufacturer maintain a strong competitiveposition by keeping costs low. The benefits of trusting supplier working relations also help strengthen a manufacturer’s competitive position. Thepurpose of this paper is to determine if manufacturer price reduction pressure and trusting working relations with the pressured suppliers, typicallyconsidered to be mutually exclusive, can co-exist.Design/methodology/approach – A structural equation modeling approach was used to analyze data covering 946 production buying situationsinvolving 279 suppliers and six NA automotive OEMs.Findings – Manufacturer price reduction pressure and trusting working relations with the pressured suppliers, are not mutually exclusive, they can co-exist.Research limitations/implications – The research found that it is not the pressure that impacts the manufacturer – supplier relations, but rather it isthe manner by which the manufacturer goes about pressuring its suppliers that impacts its supplier working relations. The research, however, does notdirectly address how a manufacturer can achieve both ends simultaneously.Practical implications – Manufacturers no longer have to choose between exerting price reduction pressures on suppliers or working to achievetrusting relations with suppliers. They can successfully do both. At the same time, suppliers must recognize that these conditions may occur and whenapplied simultaneously ultimately benefit both parties.Originality/value – This research adds to the critically under-researched B2B pricing processes and pricing impact areas, while helping to influencemanagerial actions, an area in which academic B2B research is considered to be lacking.

Keywords Supplier relations, Price positioning, Automotive industry

Paper type Research paper

An executive summary for managers and executivereaders can be found at the end of this article.

Introduction

From the earliest days of theory building, channel andsubsequently supply-chain strategy has revolved around issuesassociated with role dependency among channel members(Kumar et al., 1995). This gave rise to the multi-faceted viewthat the channel can be considered an economic, functional,institutional, and/or social organization. Rosenberg and Stern(1970) confounded this view, which is based on the idea thatchannels are predominantly cooperative, by suggestingconflict is a critical channel characteristic. This notionprovided the added facet that the channel can be considereda behavioral, “goal-seeking, role defining, power-exercising,and informational exchanging” system.The context of the contending paradigms of cooperation

versus conflict raised several issues for researchers. Namely,how to accurately predict the observed relationships withinchannels and how to present prescriptive rules for inter-firminfluence strategies. Researchers subsequently introduced

several themes, such as power, relationships, commitment,trust, conflict resolution, etc., to overcome these issues.Frazier and Rody (1991), for example, hypothesized that

the dependence levels of downstream channel members onupstream members have a significant bearing on the extent ofcooperation afforded to and tolerance of upstream channelmembers’ influencing strategies. Kumar et al. (1995),however, observed that the literature offered contradictoryconclusions, with some researchers suggesting that a firm’sdependence on its partner increases conflict and the partner’suse of coercion, while others reported an opposite effect.They cite Frazier and Rody (1991) who attempted to explainthis contradiction by suggesting that different inter-dependence contexts lead to differing conclusions on themost effective inter-firm influencing strategies. They alsomention Stern and Reve’s (1980) thesis that greaterasymmetry in power and dependence levels lead to channelrelationships that are more dysfunctional, less stable, and lesstrusting. In fact, Frazier and Rody’s (1991) research wasconceptualized to shift the spotlight from research focused onasymmetrical channel relationships to what they believed wasthe more common situation in industrial product channels,namely more moderate downstream dependence levels,suggesting the effectiveness of more collaborative ratherthan adversarial strategies, by upstream channel members.More recently Maloni and Benton (2000) considered power

to be defined as the ability of one firm to influence the

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0885-8624.htm

Journal of Business & Industrial Marketing

23/5 (2008) 287–300

q Emerald Group Publishing Limited [ISSN 0885-8624]

[DOI 10.1108/08858620810881566]

Received: November 2005Revised: August 2006Accepted: March 2007

287

intentions and actions of another firm, noting that thedifferent bases of power (mediated versus non-mediated,coercive versus non-coercive, and economic versus non-economic) meaningfully affect inter-firm relationships insignificant, yet contrasting ways.This evolution of researchers’ perception of the interactions

of channel members is further complicated by the rise of amore complex business environment in recent years. Forexample, channel management has increasingly shifted from atransactional to a relationship orientation. Also, globalizationand greater cross-border integration within industries, hasresulted in a shift towards a global supply and value chainperspective, and a subsequent move away from verticallyintegrated channels and kieretsu-like dependencies. Thesechanges have contributed to a call for more collaborativerelationships.On the other hand, the increase in the hyper-

competitiveness of the global economy and the need forsignificant cost reductions in increasingly integrated globalsupply chains have necessitated the need for more forcefulinter-firm influencing strategies. These concerns have lead toa more adversarial approach by many firms. Complicating thisadversarial versus collaborative dichotomy is the realizationthat effective collaborative relationships are engenderedthrough trust and commitment developed over the longhaul, while cost reduction needs are more immediaterequiring achievement in the short-term.The automotive industry, where much of the early channel

empirical research occurred and a significant share of thecurrent research is still situated, exhibits these broad trends inchannel management, and supply chain integration theoryand practice. While the automotive industry has ampleexamples of supplier relations migrating from a transactionaladversarial approach to supplier relations with a heightenedlevel of transparency and collaboration, several largeautomotive industry organizations still embrace anadversarial approach to their suppliers (e.g. Chandler, 2005;Emiliani, 2003; Sherefkin, 1999, 2003; Sherefkin andArmstrong, 2003). No where is this more true than whenthe domestic OEMs, Chrysler, Ford, and General Motors,demand price reductions from their suppliers.It is in this context, collaborative supplier relations and

adversarial price reduction pressure, that the present researchhas been designed and implemented in the automotiveindustry.

Background

Adversarial tactics are a common approach on whichmanufacturers have historically relied to get suppliers tomeet their price reduction expectations. While the adversarialapproach gained its greatest notoriety in the early 1990sunder J. Ignacio Lopez de Arriortua, the General Motors VPof Purchasing, who reduced GM’s parts bill several billiondollars a year by cajoling and threatening suppliers (TheEconomist, 1998; Gardner, 1993), the adversarial approach toget the lowest possible price from suppliers had been usedwell before Lopez (Bhote, 1987) and continues today (Kobe,2001; Maremont and Berner, 1999; Pryweller, 1999;Sherefkin, 1999; Sherefkin, 2003; Shirouzu, 2003). Manymanufacturers, nonetheless, are forsaking the adversarialapproach (e.g. Dyer, 2000; Krogh, 2004; Lewis, 1999; Liker,2004; Nelson et al., 2001; Stallkamp, 2005) believing thatmore benefits result from co-operative, rather than adversarialsupplier relations.

The benefits of co-operative relationships can besubstantial. Fine (1998) in his book, Clockspeed, argues thata firm’s competitive advantage, as well as its core competency,is the result of the web of relationships a firm developsthroughout its “chain of suppliers, distributors, and alliancepartners.” Liker and Choi (2004) add to this argumentsuggesting that partnerships are the supply chain’s lifeblood.The price reduction outcome of adversarial relations,

however, cannot be easily dismissed. The need formanufacturers to maintain a competitive position in anincreasingly competitive marketplace makes the achievementof lower prices, or, at the least, maintaining prices whileproviding greater value, an absolute necessity in virtuallyevery industry. At the same time, manufacturers need thecompetitive advantages that result from having trustingsupplier working relations.A review of 20 years of business-to-business (B2B)

marketing literature (Reid and Plank, 2000) found that“pricing processes and the impact of price as it relates toorganizational buying processes is critically underresearched.” As a result, the academic literature provides nodirection to the interaction of manufacturer price reductionpressure and the working relations with the pressuredsuppliers.At the same time, Spekman (2000) and Wilson (2000) have

challenged the academic community with the recognition thatthe academic B2B field has not had much impact ininfluencing managerial actions. Our experience of workingwith large manufacturers and their suppliers in NorthAmerica and Europe, in a variety of industries during thepast 35 years, suggest that there is an opportunity to influencemanagerial actions by helping management reconcile theintuitively apparent contradiction of simultaneous pricereduction pressure and trusting supplier working relations.To determine if these two conditions, manufacturer price

reduction pressure and trusting supplier working relations, aremutually exclusive or if they can co-exist is a worthwhileendeavor for three reasons. First, it will add to the academicdialogue of B2B pricing concerns. Second, the outcome willprovide management specific direction as to how to addressthese two actions. Third, it will add to the literature thatinfluences managerial actions. To achieve these purposes thepaper focuses on the belief that price reduction pressure andtrusting supplier relationships are mutually exclusive.

Theory and hypotheses

Since the focus of this study is co-operative manufacturer-supplier relations and its relationship components, it was feltthat the relationship approach (e.g. Dwyer et al., 1987;Morgan and Hunt, 1994) provides a rational framework forthe most relevant constructs to be investigated, as well as anapproach to determine how manufacturer price reductionpressure might impact the manufacturer’s co-operativesupplier relations. The conceptual model that is discussed inthis section is summarized in Figure 1.Using the relationship approach as the rational framework

also leads to the conclusion that the North Americanautomotive industry would be the most appropriate industryin which to conduct the study. It is well-documented that thefull range of adversarial to high trusting working relationsexist between the automotive original equipmentmanufacturers (OEM) and their tier 1 suppliers and thatthe industry is characterized by high OEM price reductionpressure on the suppliers (Chandler, 2005; Sherefkin andArmstrong, 2003).

Manufacturer price reduction pressure and supplier relations



Volume 23 · Number 5 · 2008 · 287–300

288

Co-operative buyer-supplier relationsManufacturers have recognized for years the value of co-operative supplier relations (e.g. Carlisle and Parker, 1989;Dyer, 2000; Grayson and Ambler, 1999; Lewis, 1999; Liker,2004; Lyons et al., 1990; Nelson et al., 2001). This has beenparticularly true in the automotive industry where studieshave shown that competitive advantage and productivityimprovements can be accrued by those manufacturers whohave co-operative relations with their suppliers (Dyer andOuchi, 1993; Frey and Schlosser, 1993; Helper and Sako,1995; Langfield-Smith and Greenwood, 1998; Nelson et al.,2001). Suppliers have also been shown to benefit from co-operative buyer-supplier relations in the areas of improvedproductivity, product quality and service, decreased leadtimes, increased competitiveness, and greater cost reductions(Ansari and Modarress, 1990; Frazier et al., 1988; Sheth andSharma, 1997).Regardless of industry, a key determinant of co-operative

buyer-supplier relations success is the relationship itself(Laseter, 1998). Among the numerous elements thatcomprise a successful co-operative relationship are fourcritical interrelated elements: trust, communication,information sharing, and commitment (Das and Teng,1998; Morgan and Hunt, 1994; Smeltzer, 1997; Wilson,1995; Zaheer et al., 1998).

TrustTrust, which social scientists describe as the most importantof the key variables in relational exchange (Lambe et al.,2001) is so important to relational exchange that Spekman(1988) considers it to be the foundation of successful strategicpartnerships. The importance of trust in B2B relations hasbeen further substantiated by Wilson’s (1995) observationthat trust is an essential component of most business-to-business relationship models. Additional studies have foundthat regardless of the sophistication of the relationship, theneed for high levels of trust among all parties is essential for

achieving co-operative buyer-supplier relations (Andersen,2001; Anderson and Narus, 1990; Arino et al., 2001; Dwyeret al., 1987; Gundlach et al., 1995; Langfield-Smith andGreenwood, 1998; Moorman et al., 1993; Morgan and Hunt,1994).The importance of trust to buyer-supplier relations suggests

that trust would be lacking in an adversarial environment inwhich the manufacturer pressured suppliers for pricereductions. Therefore, if price reduction pressures andtrusting manufacturer-supplier relations are mutuallyexclusive then:H1. The greater the manufacturer price reduction pressure

on suppliers, the lower will be the pressured suppliers’trust of the manufacturer.

Communication and information sharingCommunication is an essential element of co-operative buyer-supplier relations (e.g. Cannon and Homburg, 2001; Dwyeret al., 1987; Jap and Ganesan, 2000; Morgan and Hunt,1994) for it is through communication that each party can setthe priorities and co-ordinate the activities necessary toachieve each other’s objectives (Mohr et al., 1996).Communication is particularly important when there is ahistory of adversarial supplier relations (Cannon andHomburg, 2001; Frazier and Antia, 1995; Stuart andMcCutcheon, 1995), such as in the automotive industry, ascommunication can be used to reinforce the benefits to berealized by the parties and in doing so help to ameliorate anylingering bad feelings or uncertainty of purpose. Toyota, forexample, recognized the importance of better qualitycommunication with suppliers when it began a process toimprove its supplier relations at Toyota Australia (Langfield-Smith and Greenwood, 1998). A common characteristic ofmanufacturer-supplier communication among these studies isthat the manufacturer’s communication with its suppliers isopen and honest.

Figure 1 Conceptual model




Volume 23 · Number 5 · 2008 · 287–300

289

Communication between manufacturers and their suppliersis also a critical element in providing the manufacturer acompetitive advantage. Helper (1991) found in the late1980s, as Japanese competition was increasing for thedomestic automakers, that the domestic automakers realizedthe need to work more closely with their suppliers to solveproblems that would eventually help them in the marketplace.Inherent in this process is more frequent information sharingby the manufacturers with suppliers and with greater amountsof information (Monczka et al., 1998; Nelson et al., 1998).In addition, for manufacturer-supplier relations to grow

into a co-operative relationship, communication between theinvolved parties must involve the sharing of both timely andmeaningful information (Anderson and Narus, 1990). Sakoand Helper (1998) further substantiated this need in the autoindustry when they found that the greater the informationshared by customers with suppliers, the greater the trust ofthe customer by the supplier.Subsequently, if trust is not present because of high price

reduction pressure, it would be expected that there would beless open and honest communication of meaningfulinformation between a manufacturer and its suppliers.Therefore, if price reduction pressures and trustingmanufacturer-supplier relations are mutually exclusive then:H2. The greater the manufacturer price reduction pressure

on suppliers, the less likely will the pressured suppliersperceive their manufacturer customers arecommunicating timely and adequate information tothem in an open and honest manner.

CommitmentWhile communication is essential to a trusting manufacturer-supplier relationship, such relationships also require thatneither party exploit the other (Morgan and Hunt, 1994).Such a commitment to the relationship by each partner isnecessary if the relationship is to work (Anderson and Narus,1990) and each party is to realize positive outcomes. Positiveoutcomes for each party are essential, as positive outcomes domore than simply provide the end result that is expected.They reinforce each party’s confidence that neither is beingtaken advantage of by the other and that each party is, tosome degree, concerned about the other’s welfare (Ganesan,1994). As these mutually beneficial concerns and subsequentactions become more prevalent between the parties over along-term relation, variables, such as commitment and trust,are critical facilitators of relational exchange (Lambe et al.,2001).Commitment has been defined as “an exchange partner

believing that an ongoing relationship with another is soimportant as to warrant maximum efforts at maintaining it”(Morgan and Hunt, 1994). It is this perspective that leadToyota (Dyer, 2000; Liker, 2004) and Honda (Laseter, 1998)to work with their suppliers in a manner that lead to highlytrusting suppliers (Chandler, 2005; Sherefkin and Armstrong,2003).A “committed” Honda and Toyota taking the lead in

building trusting supplier working relations is consistent withthe findings of Frazier and Rody (1991). They found thatwhen one party in a buyer-supplier dyad has adisproportionate amount of power, it is the party with thepower, e.g. Honda and Toyota, that must take the initiative inthe use of non-coercive activities if conflict in the dyad is to bereduced. These findings were substantiated in the automotiveindustry by Maloni and Benton (2000) in their study of powerin the automotive industry. Additionally, the influencestrategies used by the more powerful member of a dyad are

reciprocated by the relatively weaker member when theweaker member is highly dependent on the other member(Frazier and Rody, 1991).Non-coercive efforts can manifest themselves in a variety of

non-opportunistic behaviors by the more powerfulmanufacturer “committed” to an ongoing relationship withits less powerful suppliers. Certainly, the “committed”manufacturer will honor its contractual commitment to thesupplier and will treat the supplier fairly in its dealings. Inaddition, the “committed” manufacturer will not only offerto, but will repay the supplier in some way in the future forproviding help or support beyond the supplier’s contractualobligations and in doing so, live up to the spirit of itscommitments over time. This sense of commitment, which isas essential as trust for successful long-term relations (Dwyeret al., 1987; Morgan and Hunt, 1994), results in the“committed” manufacturer treating the supplier in a mannerthat clearly indicates the supplier is valued (Moorman et al.,1992).The actions of a “committed” manufacturer suggest that

the manufacturer would act in a manner that would tend toreinforce trusting relations with its suppliers, rather than in anadversarial opportunistic manner to achieve the lowestsupplier price. This leads to our third hypothesis. If pricereduction pressures and trusting manufacturer-supplierrelations are mutually exclusive the importance ofmanufacturer commitment to trusting manufacturer-supplierrelations suggests that:H3. The greater the manufacturer price reduction pressure

on suppliers, the less likely will the pressured suppliersperceive the manufacturer is acting in a manner thatreinforces their commitment to their suppliers.

Maturity of strategic sourcingManufacturers have been shown to take actions that precludethe need to pressure suppliers for price reductions. It has beensuggested that supplier and manufacturer relations passthrough a series of stages or phases (e.g. Bhote, 1989;Hakansson and Snehota, 1995; Iacobucci and Zerrillo, 1997;Langfield-Smith and Greenwood, 1998) eventually endingwith a relationship that is characterized by mutual trust, withmanufacturer and supplier working closely together to achievelower costs. It has been found that the longer the association,i.e. as the relationship moves through its stages, the moreprofitable is the relationship to both the manufacturer and itssuppliers. A well-maintained buyer-supplier relationshipreduces transactional costs and generates higher qualitygoods, while keeping governance costs lower than intransactional markets (Heide and John, 1992; Sheth andParvatiyar, 2000). In addition, it has been suggested that thelack of price reduction pressure may be related to the maturityof the manufacturer’s approach to strategic sourcing (Bhote,1989; Monczka and Trent, 1991). Furthermore, managementin leading-edge firms in various industries, who participatedin the Michigan State University integrated procurementstrategies study, projected a similar evolution in the manner inwhich their firms would be working with suppliers in thefuture (Monczka and Trent, 1991).These projections suggest that a manufacturer will have a

decreasing need to pressure its suppliers for price reductionsas the relationship between itself and its suppliers maturestoward more trusting working relations. Supplier actionsreinforce this manufacturer behavior. As a supplierapproaches a partnership-like relationship with itsmanufacturing customer, it is in the supplier’s self-interest




Volume 23 · Number 5 · 2008 · 287–300

290

to strengthen and reinforce the mutual trust that is developingby being increasingly more proactive in maintaining, if notreducing, its prices to its customer. These supplier-initiatedactions will reduce the manufacturer’s need to pressure andmonitor the supplier for price reductions. As a result, it wouldbe expected, that as a manufacturer-supplier relationshipevolves to being mutually more trusting, the manufacturerand supplier will jointly work together to achieve the desiredmanufacturer prices. Manufacturer price reduction pressurewill, subsequently, not be needed. Therefore, if pricereduction pressures and trusting manufacturer-supplierrelations are mutually exclusive it would be expected that:H4. The greater the manufacturer price reduction pressure

on suppliers, the less likely will the pressured suppliersperceive they have a good overall buyer-supplierrelationship with the manufacturer.

Research methodology

Sampling frameThe subjects of this study are tier 1 production goodssuppliers to the six major North American automotiveoriginal equipment manufacturers (OEM): Chrysler, Ford,General Motors, Honda, Nissan, and Toyota. The behavior ofsuppliers is an acceptable and necessary component ofunderstanding exchange relationships (Hunt, 1983).The study involved a mail survey in which the highest-

ranking individual(s) responsible for OEM sales at each majorNorth America tier 1 production goods suppliers was mailedthe survey package. The names were obtained from acommercial organization that annually publishes a list of tier 1supplier personnel (ELM International Inc., 2001). Involvingthe highest-ranking sales person responsible for OEM saleshelped to minimize key-informant bias that could result fromusing informants with varying roles within the supplierorganizations. This approach followed the generalrecommendation to use the most knowledgeable informant(Kumar et al., 1993).

Instrument developmentThe survey instrument was developed in several stages.Initially, we reviewed the literature to identify potential buyer-supplier relationship measures that could possibly be used inour research project. Second, we structured an interviewingprocess around the potential measures. We then interviewedover 20 supplier sales personnel, ranging from vice presidentsof sales and marketing to managers of customer sales teams,in a variety of tier 1 automotive suppliers to gain anunderstanding of their perception of the appropriateness ofthe measures to describe relations between their firm and thefirm’s OEM customers.Fourth, we took the measures the interviewees identified as

the most descriptive of their OEM-supplier relations anddeveloped a questionnaire using these measures, using asingle scale from several past relevant studies (e.g. Mohr andSpekman, 1994) that would enable respondents to morequickly and easily provide their opinions (Alreck and Settle,1995). We then returned to the supplier sales personnel weinterviewed earlier to make certain that the questions, asstructured, measured the relationship item appropriately. Wealso asked 17 OEM purchasing personnel at four OEMs theiropinion of the validity of the questions as related to theirsupplier relationship experiences.In the final stage we modified the questions based on the

comments of the supplier sales and OEM purchasing

personnel and conducted a pre-test involving over 30 tier 1sales personnel. The questionnaire was modified to addressthe few issues that were raised in the pre-test and the surveywas implemented.

Measurement constructsAs the instrument development process progressed themeasures that evolved to be most meaningful to the salespersonnel fell under four general areas: trust, communicationand information sharing, commitment, and good buyer-supplier relationships.

TrustThe OEM treatment of its suppliers is reflected in the reactionof the suppliers to the commitment the OEM has todeveloping and maintaining trusting working relations withsuppliers. Suppliers have indicated that the trust they have ofthe OEM is a reflection of this commitment by the OEM (e.g.Das and Teng, 1998; Dyer and Chu, 1997; Smeltzer, 1997).Consequently, this measure was included in our analysis.

Communication and information sharingIn 1990 Mohr and Nevin (1990) identified communicationstrategies among channel members as having the essentialcharacteristics of frequency, being regularized and structured(formal mode), and content. Subsequently, Mohr andSpekman (1994) building on their idea of communicationbehavior found that successful partnerships tended toexperience higher levels of communication quality: timely,accurate, adequate, and relevant information; and higherlevels of information sharing then did less successfulpartnerships. Exploring these basic ideas with supplierssubsequently evolved into three measures of OEMcommunication in this study: having open and honestcommunication with suppliers, and providing timelyinformation and adequate amounts of information tosuppliers. From the viewpoint of the suppliers in the pretestand earlier stages of the study we found, like Mohr andSpekman (1994), that a five point itemized extent scaleranging from very little extent to very great extent fullydescribed these measures. To maintain consistency among thequestions we used this scale with all of our measures.

CommitmentMohr and Spekman (1994) in their evaluation of thecharacteristics of successful partnerships also found that,along with communication; quality, coordination,commitment, and trust between partners, are importantelements for success. These four characteristics are embodiedin the findings of Gundlach et al. (1995) that crediblecommitments between parties result in social norms thatevolve toward a governance approach which help to stabilizelong-term exchange relations. Exploring these ideas withsuppliers lead to four measures both the supplier sales andOEM purchasing personnel agreed describe importantaspects of their working relations: suppliers being treated asvalued suppliers by the OEMs, OEMs honoring theircontractual commitments, OEMs living up to the spirit oftheir commitments to suppliers, and OEMs being fair in theirdealings with suppliers.

Good buyer-supplier relationshipsOne interesting outcome of the supplier interviews was theinterviewees’ predilection to describe the overall relationshipthey had with each of their OEM customers in terms of“good” or “bad.” As they perceived the occurrence,frequency, and/or quantity of each of the preceding variablesto be greater they were more likely to perceive their overall




Volume 23 · Number 5 · 2008 · 287–300

291

relationship with their OEM customer as being good. Theydid not, interestingly, characterize their relationship in termsof partnership-like, which is how academicians tend todescribe the positive confluence of these variables.Subsequently, the respondents were asked to describe theiroverall relationship with each of their OEM customers interms of being a good overall working relationship.

Price reduction pressureTo gain an understanding of the price reduction pressure thesupplier perceived was being exerted on their firm by eachOEM customer we simply asked the suppliers the extent towhich such pressure was felt. To reduce the subjectivity of thismeasure we also asked the specific price reduction percentagethe OEM asked of the supplier and the corresponding pricereduction percentage the supplier gave the OEM during theprevious year for the buying situation the supplier wasanswering the survey questions. During the pretest we foundthat these are two numbers that every supplier is acutelyaware as they represent the more contentious component ofthe supplier – OEM working relations, involving numeroussupplier personnel in a variety of functional areas acrossseveral levels of management when determining how andwhat to respond to the OEM’s demands, while clearlyimpacting the supplier’s profitability.

Data collectionThe survey package was mailed to the highest-ranking salespersonnel responsible for the OEM account. It wasanticipated that the recipient of the questionnaire wouldtypically involve other members of the firm in answering thequestionnaire because of the breadth of the questions. Thisexpectation was justified as over 71 percent of thequestionnaires in this survey were completed by cross-functional team consensus, a lead individual surveying andaccumulating opinions of other sales team members and/orother functional areas, or a lead individual asking others tofill-in various sections of the questionnaire. The remainingquestionnaires (29 percent) were completed by a singleindividual. In the latter case, the suppliers generally weresmaller in annual sales, $30 to $75 million, provided a singleproduct line to several of the OEMs, and/or included only oneor two OEMs among its customers.The survey was structured to ensure anonymity of the

respondents and confidentiality of the completedquestionnaire. These conditions were discussed in pre-surveyand survey lettersmailed to the supplier, and on the cover of thequestionnaire. The intent of repeating these conditions was toinstill a high degree of willingness on the part of the respondentsto participate in the study, as well as to help ensure that theywould be frank and candid in their response.The survey package also contained a sheet on which was

listed the respondent’s name and company, and a statementindicating the questionnaire had been completed and mailedback to us under separate cover. The respondent was asked tofax us the sheet when they mailed the completedquestionnaire. Each non-responding supplier was mailed aseries of up to three reminder letters emphasizing theimportance of their participation.This concentrated effort to encourage participation in the

surveys is based on Dillman’s (1978) total design method.

Survey sampleThe supplier sales-related respondents were asked to answerthe questions for each of the six major North AmericanOEMs (Chrysler, Ford, General Motors, Honda, Nissan, and

Toyota) their firm was currently supplying on the basis of thecommodity area (powertrain, chassis, exterior, interior,electrical and electro-mechanical, and body-in-white) theysupplied the OEM.Atotal of 279completeduseable questionnaires resulted from

a mailing of 642 surveys (April-June 2002) for an effectiveresponse rate of 43.5 percent. The respondents, eachrepresenting a unique supplier, provided information on 946OEM – commodity area buying situations, the study’s unit ofanalysis, for anaverageof3.39buying situationsper respondent.The participating respondents’ self-reported 2001 North

American automotive OEM sales range from $30 million toalmost $30 billion. The 279 participating suppliers, on thebasis of their 2001 North American OEM sales, suppliedapproximately 47 percent of the annual production buy of thesix OEMs. This figure, plus the ability to evaluate theresponses to specific questions relative to the same questionsin similar surveys of previous years, indicated that the resultsof the study are representative of the tier 1 supplier populationof the North American automotive industry.

Analysis and results

Proposed research modelWe propose the model in Figure 2 as our research model. It ispresented as a causal model. The major underpinning of thisresearch is that OEM price reduction pressure on suppliersand trusting OEM-supplier relations with the pressuredsuppliers could be independent of each other.OEM-supplier working relationship (h4) is presented as a

dependent variable that is directly influenced by supplier trustof OEM (h3). Supplier trust of OEM (h3), in turn, is modeledas a variable that is directly influenced by two factors: OEMcommunication and information sharing with suppliers (h1),and the OEM commitment to suppliers (h2). That OEMprice reduction pressure on suppliers (j1) may affect theOEM-supplier working relationship (h4) is modeled bytreating OEM price reduction pressure on suppliers (j1) asan independent variable that affects OEM communicationand information sharing with suppliers (h1), OEMcommitment to suppliers (h2), and supplier trust of theOEM (h3).When the OEM demands price reductions, the demand

itself may be both a reflection of existing price reductionpressure and/or a cause of more price reduction pressure.Thus, OEM price reduction asked of supplier (h5) is modeledas an endogenous variable that is influenced by OEM pricereduction pressure on suppliers (j1). OEM price reductionasked of supplier (h5), in turn, directly influences supplierprice reduction given to OEM (h6), the second dependentvariable in this research.The two endogenous variables, h5 and h6, are not part of

the theoretical structure of the proposed research model.They are included in the structural equations model of thisresearch only to evaluate the criterion-related validity of theprice pressure construct.

Measurement modelThe indicators used for the measurement of the constructs inthe proposed model are presented in Table I. Since two of theconstructs, communication and information sharing, andcommitment are measured using multiple indicators (y1-y3and y4-y7, respectively) the indicators of these constructswere assessed for unidimensionality and reliability usingITAN (Gerbing and Hunter, 1988), a statistical package foritem analysis using correlational data.




Volume 23 · Number 5 · 2008 · 287–300

292

ITAN analysis indicated that the multi-item indicators were

strong on the criteria of unidimensionality. Indicators loaded

significantly higher on their own constructs than on other

constructs. The tendency to load higher on one construct may

be viewed as a reflection of convergent validity (although the

measures are not based on multiple methods) and the low

loading against other constructs may be viewed as a reflection

of discriminant validity. Measure reliability of multi-indicatormeasures was assessed using coefficient a. The standardizedvalues of coefficient a were 0.855 for Communication and0.897 for Commitment. The results from ITAN analysisprovide support for the unidimensionality and the reliabilityof the indicators in the measurement model.

Analysis of proposed research modelThe analysis was performed on a covariance matrix of thecollected data in two stages. In the first stage, the proposedresearch model (Figure 2) was tested and assessed usingLISREL 8.30 (Joreskog and Sorbom, 1999). In the secondstage, the model was adjusted by removing specific links andconstructs, and the results of LISREL analysis were evaluatedin order to evaluate the importance of the links that wereremoved and the changes that were made.The results of LISREL analysis provide moderate support

to the proposed research model. The chi-square goodness-of-fit do not support the model (x2 ¼ 355:91, p ¼ 0:0). The rootmean square error of approximation (0.10) and the root meansquare residual (0.11) provide only weak support. Thenormed fit index (0.92), the comparative fit index (0.93), theincremental fit index (0.93), and the relative fit index (0.89),all provide strong support for the structural relationshipsmodeled. The Goodness-of-fit index (0.91), the adjusted

Figure 2 Proposed research model

Table I List of Indicators

Var. no. Label Indicator description

1 x1 OEM pressure on suppliers to reduce prices

2 y1 OEM communicates openly and honestly with suppliers

3 y2 OEM provides suppliers timely information

4 y3 OEM provides suppliers adequate information

5 y4 OEM treats suppliers as valued

6 y5 OEM honors its contractual commitment

7 y6 OEM lives up to its spirit of commitments

8 y7 OEM is fair in its dealings with suppliers

9 y8 Supplier trust of OEM

10 y9 Good overall OEM-supplier working relationship

11 y10 OEM price reduction asked of suppliers

12 y11 Supplier price reduction given to OEM




Volume 23 · Number 5 · 2008 · 287–300

293

goodness-of-fit index (0.86), and the parsimony goodness-of-fit index (0.57) provide fairly good support for the model.Unlike the fit of the overall model, the values of most of the

structural coefficients are significant (with T-values # 21.96or .1.96). The values of the structural coefficients from thestandardized solution are presented in Table II.The structural coefficient of 0.84 in Table II provides strong

support for the positive relationships between OEM-supplierworking relationship and supplier trust of OEM (0.84, b43).The relationship between OEM commitment to suppliers andsupplier trust of OEM (0.82, b32) was also found to besignificant, substantial, and positive. The relationshipbetween OEM communication and information sharing withsuppliers, and supplier trust of OEM (0.16, b31) remainspositive and significant, but relatively weaker. The directrelationship between OEM price reduction pressure onsuppliers and supplier trust of OEM (20.06, g31), andOEM-supplier working relationship (0.04, g41) are both veryweak, negative, and are not significant. The correlation (c21)between the residuals of the endogenous variables (OEMcommunication and information sharing with suppliers, andOEM commitment to suppliers) indicate a strong significantand positive relationship of 0.61.The relationship between OEM price reduction pressure on

suppliers, the only exogenous variable in the model, andOEM communication and information sharing with suppliers(g11), although significant, is relatively weak and negative witha value of 20.17. The relationship of the exogenous variableand OEM commitment to suppliers (g21) is also negative andsignificant, but stronger (20.36).The relationship between OEM price reduction pressure on

suppliers (j1) and OEM price reduction asked of supplier(0.30, g51) and that between OEM price reduction asked ofsupplier and supplier price reduction given to OEM (0.55,

b65) are significant, substantial, and positive. The values ofthese two structural coefficients indicate that themeasurement of price pressure in this research possesses anacceptable level of criterion-related validity.

Hypothesis 1The value of g31 (Table II), the structural coefficient betweenOEM price reduction pressure on suppliers and supplier trustof OEM, is very weak (20.06) and not significant. Table IIindicates that the value of g31 contrasts sharply with the muchhigher b31 value, representing the impact of OEMcommunication and information sharing with suppliers onsupplier trust of OEM, and b3(, representing the impact ofOEM commitment to suppliers on supplier trust of OEM.The above findings of LISREL analysis have important

managerial implications. They indicate that conscious andwell-planned efforts to maintain superior communication withand commitment to suppliers, even in the presence of pricereduction pressure, may reduce the negative impact of pricereduction pressure on trust through the weakening of therelationships represented by g11 and g21.The findings of LISREL reject H1. The results of LISREL

analysis indicates that this relationship is mostly captured bythe indirect relationship between OEM price reductionpressure and supplier trust of the OEM through the latentvariables communication and commitment.

Hypothesis 2The price reduction pressure – communication relationshipsdescribed in H2 can be tested by examining the values of therelevant structural and measurement coefficients in theLISREL model analyzed in this research. OEM pricereduction pressure on suppliers is represented by theindicator x1, the sole indicator of the latent variable j1. Itsvalue is fixed at 1. Communication is measured by threeindicators: OEM communicates openly and honestly withsuppliers (y1), OEM provides suppliers timely information(y2), and OEM provides suppliers adequate information (y3).The results of this LISREL analysis provide weak to moderatesupport for the existence of a negative relationship (g11)between price reduction pressure and communication (TableII), and H2.

Hypothesis 3In H3, OEM commitment to its pressured suppliers isrepresented by a latent variable with four indicators: y4, OEMtreats suppliers as valued; y5, OEM honors its contractualcommitments; y6, OEM lives up to spirit of its commitments;and, y7, OEM is fair in dealings with suppliers (Table I andFigure 2). The value of g21 generated through LISRELanalysis is relatively strong (20.36) and in the hypothesizeddirection (Table II). Thus, H3 is supported.

Hypothesis 4The impact of OEM price reduction pressure on suppliersand OEM-supplier working relationship is represented in theproposed model by the direct path consisting of structuralcoefficient g41, in Table II and Figure 2. The relationship isalso partly traced by the indirect paths through OEMcommunication and information sharing with suppliers, OEMcommitment to suppliers, and supplier trust of OEM (g11,b3(, b43, or g21, b32, b43, or g31, b43; see Figure 2).The results of LISREL analysis do not support H4. The

direct relationship (g41) between the two variables is veryweak (0.04) and not significant. Hence, the relationshipbetween j1 and h3 or h4 is unlikely to bypass OEMcommunication and information sharing with suppliers, andOEM commitment to suppliers. This indicates that the

Table II Theoretical structure analysis: standardized solution structuralcoefficients

Indicators Coefficients

g11 OEM price reduction pressure on suppliers and OEM

communication with suppliers 20.17S


commitment to suppliers 20.36S

g31 OEM price reduction pressure on suppliers and

supplier trust of OEM 20.06

g41 OEM price reduction pressure on suppliers and OEM-

supplier working relationship 0.04


price reduction asked of supplier 0.30S

c21 OEM communication and information sharing with

suppliers, and OEM commitment to suppliers 0.61S

b31 OEM communication and information sharing with

suppliers, and supplier trust of OEM 0.16S

b32 OEM commitment to suppliers and supplier trust of

OEM 0.82S

b43 Supplier trust of OEM and OEM-supplier working

relationship 0.84S

b65 OEM price reduction asked of supplier and supplier

price reduction given to OEM 0.55S

Notes: The superscript s denotes significance as reflected in a t-value# 2 1.96 or $1.96




Volume 23 · Number 5 · 2008 · 287–300

294

relationship, if any, between OEM price reduction pressureon suppliers and OEM-supplier working relationshipprobably takes place through OEM communication andinformation sharing with suppliers, and/or OEM commitmentto suppliers, and through supplier trust of OEM, as describedin the proposed model (Figure 2), thus validating our researchmodel.

Further analysisIn order to examine the hypothesized relationships in greaterdetail, the model was analyzed a second time (Figure 3), firstby removing all three of the intervening variables betweenOEM price reduction pressure on suppliers and OEM-supplier working relationship. Then these variables werereintroduced, first supplier trust of OEM and then OEMcommunication and information sharing with suppliers, andfinally OEM commitment to suppliers. When all threeintervening variables are removed a significant negativerelationship of 20.37 appears between OEM pricereduction pressure on suppliers and OEM-supplier workingrelationship. This appears to support the popular belief,reflected in H4, that OEM price reduction pressure onsuppliers is bound to adversely affect OEM-supplier workingrelationships.The introduction of supplier trust of OEM as an

intervening variable explains the OEM-supplier workingrelationship better. The direct relationship between OEMprice reduction pressure on suppliers and OEM-supplierworking relationship, however, is weak and not significant(0.05). The relationship between supplier trust of OEM andOEM-supplier working relationship is significant and positive(0.80). The relationship between OEM price reductionpressure on suppliers and supplier trust of OEM also issignificant, but in the opposite direction (20.38). Theintroduction of supplier trust of OEM as an interveningvariable shows the path of the hypothesized negativerelationship.The introduction of OEM communication and information

sharing with suppliers and OEM commitment to suppliersbring the model to the form represented in Figure 2. As statedearlier, it shows that the negative relationship is due to the

negative impact of OEM price reduction pressure on supplierson OEM communication and information sharing withsuppliers and OEM commitment to suppliers. Since OEMcommunication and information sharing with suppliers andOEM commitment to suppliers consists of variables overwhich management can exercise control, management can,with the appropriate degree of attention paid to thesevariables, neutralize the proposed negative relationshipbetween OEM price reduction pressure on suppliers andOEM-supplier working relationship. In other words, if thepressure is applied in a manner that is consistent with trustingworking relations and with considerable open and honestcommunication between manufacturer and supplier thepotential adverse impact of the pressure will be mitigated.

Managerial implications and future research

Difficult decisions that involve choosing between twomutually exclusive alternatives are not unusual formanagement. In today’s competitive marketplace, manylarge manufacturers who are increasingly dependent upontheir suppliers for lower cost goods feel that they are caughtbetween deciding whether they should develop trustingworking relations with these suppliers or pressure them forlower prices.This study began with the expectation that these two

situations, both of which have been shown to contribute to amanufacturer’s competitive advantage, are mutually exclusive.Analysis of these two situations at the six major NorthAmerican automotive OEMs (Chrysler, Ford, GeneralMotors, Honda, Nissan, and Toyota), however, found nomeaningful, significant relationship between manufacturerprice reduction pressures on suppliers and the state of themanufacturers’ working relationship with the pressuredsuppliers (Table III, H4). In addition, no meaningfulsignificant relationship was found between manufacturerprice reduction pressure and supplier trust of themanufacturer (Table III, H1). These findings indicate that amanufacturer can apply price reduction pressure on supplierswhile having a trusting working relationship with thepressured suppliers.

Figure 3 Adjusted models




Volume 23 · Number 5 · 2008 · 287–300

295

There was, however, moderate support for manufacturercommunication with suppliers being perceived by pressuredsuppliers to be honest and open, or associated with worthwhileinformation (Table III, H2). In addition, commitment to thepressured suppliers by the manufacturers demanding pricereductions was found to be less than positive (Table III, H3).Nonetheless, these threeOEMcharacteristics, open and honestcommunication with suppliers, providing suppliers worthwhileinformation, and positive commitment to suppliers, are eachvery important conditions for trusting manufacturer-supplierrelations to exist.

Implications for manufacturersThe nature of the global marketplace requires thatmanufacturers provide good value if they hope to becompetitive. While manufacturers can continually improvethe efficiency of their internal operations, they cannot hope toremain competitive without also involving their suppliers(Fine, 1998; Liker and Choi, 2004). One approach toinvolving their suppliers in creating value for their end-customers, is for manufacturers to apply considerable pricereduction pressure on their suppliers. Another approach is todevelop trusting working relations with their suppliers.This research found that manufacturers can pressure

suppliers for price reductions while having trusting workingrelations with these same pressured suppliers. The researchfindings suggest, however, that the pressure must beaccompanied with actions that reinforce the suppliers’perception that the manufacturer wants and is workingconscientiously on developing and maintaining trustingworking relations with its suppliers. These actions includethe manufacturer being sincere and fair in the manner itworks with its suppliers, and sharing timely and informativeinformation, openly and honestly.

Implications for suppliersSuppliers must realize that marketplace competitivenessvirtually demands that their customers continually pressurethem for price reductions. In fact, price reduction pressure onsuppliers must occur, for low procurement costs are animportant element in helping ensure a manufacturermaintains its competitive advantage in the marketplace.Subsequently, if a supplier is providing goods to amanufacturer that is working to develop and maintaintrusting working relations with its suppliers, the supplier

should not expect that these actions preclude themanufacturer from also applying price reduction pressures.Suppliers must recognize that these conditions,

manufacturer customers working toward trusting supplierrelationships and manufacturer price reduction pressures,when applied simultaneously ultimately benefit both parties.

Limitations and directions for future researchThe current research, however, does not address directly theissue of how can a manufacturer achieve both endssimultaneously. This study and others suggest the mannerin which suppliers are treated, and open and honestcommunication as important characteristics of trustingmanufacturer-supplier working relations. No research,however, has related these characteristics to manufacturerprice reduction pressure on suppliers. Consequently, a firststep would be to compare and contrast the manufacturer –supplier relationship characteristics of manufacturers withgood supplier relations with the characteristics ofmanufacturers with bad supplier relations under conditionsof manufacturer high price reduction pressure. A second stepwould be to determine how manufacturers with goodmanufacturer – supplier relations maintain those goodrelations while pressuring its suppliers to reduce prices.Finally, a third step would be to consider how a manufacturercan continue to maintain price reduction pressures on itssuppliers while simultaneously improving its supplierrelationships. The answers to these questions would provideadditional insight into how manufacturers can improve theirall around competitiveness.

Conclusion

The competitive conditions of the global marketplace areincreasing the pressure on manufacturers to maintain, if notlower, costs while increasing the value of their end product.Manufacturers cannot do this alone. With over 50 percent ofcosts attributed to suppliers, on average, manufacturers mustalso involve their suppliers in a manner that will enable thesuppliers to maximize their contribution to the manufacturer’scompetitive advantage, while responding to themanufacturer’s price reduction pressure. This study hasshown that these two seemingly incompatible approaches,pressuring suppliers for price reductions and maintainingtrusting relations with the pressured suppliers, can occurconcurrently. Management is now assured that they can

Table III Price reduction pressure and related hypotheses

No. Hypothesis

Value of structural

coefficient * Conclusions

H1 The greater the manufacturer price reduction pressure on suppliers, the lower will be the pressured

suppliers’ trust of the manufacturer 20.06

Not supported

H2 The greater the manufacturer price reduction pressure on suppliers, the less likely will the pressured

suppliers perceive their manufacturer customers are communicating timely and adequate

information to them in an open and honest manner 20.17S

Weakly to moderately

supported


suppliers perceive the manufacturer is acting in a manner that reinforces their commitment to their

suppliers 20.36S

Moderately supported


suppliers perceive they have a good overall buyer-supplier relationship with the manufacturer 0.04

Not supported

Notes: SSignificant at the 0.05 level; * Contrasted with the relevant structural coefficients for the following relationships: trust and working relationship, 0.84S;treatment and trust, 0.82S; communication and trust, 0.16S; and price reduction asked and price reduction given, 0.55S




Volume 23 · Number 5 · 2008 · 287–300

296

achieve both end results. In realizing this end the study hasachieved its objectives.

References

Alreck, P.L. and Settle, R.B. (1995), The Survey ResearchHandbook, Richard D. Irwin, Inc., Chicago, IL.

Andersen, P.H. (2001), “Relationship development and

marketing communication: an integrated model”, Journalof Business and Industrial Marketing, Vol. 16 No. 3,

pp. 167-82.Anderson, J.C. and Narus, J.A. (1990), “A model of

distributor firm and manufacturer-firm working

partnerships”, Journal of Marketing, Vol. 54 No. 1,

pp. 42-58.Ansari, A. and Modarress, B. (1990), Just-in-time Purchasing,Free Press, New York, NY.

Arino, A., de la Torre, J. and Ring, P.S. (2001), “Relational

quality: managing trust in corporate alliances”, CaliforniaManagement Review, Vol. 44 No. 1, pp. 109-31.

Bhote, K.R. (1987), Supply Management: How to Make USSuppliers Competitive, American Management Association,

New York, NY, pp. 14-19.Bhote, K.R. (1989), Strategic Supply Management: A Blueprint

for Revitalizing the Manufacturing-supplier Partnership,American Management Association, New York, NY,

pp. 12-21.Cannon, J.P. and Homburg, C. (2001), “Buyer-supplier

relationships and customer firm costs”, Journal ofMarketing, Vol. 65 No. 1, pp. 29-43.

Carlisle, J.A. and Parker, R.C. (1989), Beyond Negotiation:Redeeming Customer-supplier Relationships, John Wiley &

Sons Ltd., New York, NY.Chandler, J. (2005), “Building trust: OEMs still don’t get it”,

Corp! Magazine, Vol. 14, p. 16.Das, T.K. and Teng, B.-S. (1998), “Between trust and

control: developing confidence in partner cooperation in

alliances”, Academy of Management Review, Vol. 23 No. 3,

pp. 491-512.Dillman, D.A. (1978), Mail and Telephone Surveys: The Total

Design Method, John Wiley & Sons, New York, NY.Dwyer, F.R., Schurr, P.H. and Oh, S. (1987), “Developing

buyer-supplier relationships”, Journal of Marketing, Vol. 51No. 2, pp. 11-27.

Dyer, J.H. (2000), Collaborative Advantage: Winning throughExtended Enterprise Supplier Networks, Oxford University

Press, New York, NY.Dyer, J.H. and Chu, W. (1997), “The determinants of inter-

firm trust in supplier-automaker relationships in the US,

Japan, and Korea”, working paper, Massachusetts Institute

of Technology, International Motor Vehicle Program,

17 December.Dyer, J.H. and Ouchi, W.G. (1993), “Japanese-style

partnerships: giving companies a competitive edge”, SloanManagement Review, Vol. 35 No. 1, pp. 51-63.

(The) Economist (1998), “The decline and fall of General

Motors”, The Economist, 10 October, pp. 63-4.ELM International Inc. (2001), The ELM Guide to US

Automotive Sourcing, 3rd ed., ELM International Inc., East

Lansing, MI.Emiliani, M. (2003), “The inevitability of conflict between

buyers and sellers”, Supply Chain Management: AnInternational Journal, Vol. 8 No. 2, pp. 107-15.

Fine, C.H. (1998), Clockspeed: Winning Industry Control in the

Age of Temporary Advantage, Persus Books, Reading, MA.Frazier, G.L. and Antia, K.D. (1995), “Exchange

relationships and inter-firm power in channels of

distribution”, Journal of the Academy of Marketing Science,

Vol. 23 No. 4, pp. 321-6.Frazier, G.L. and Rody, R.C. (1991), “The use of influence

strategies in interfirm relationships in industrial product

channels”, Journal of Marketing, Vol. 55 No. 1, pp. 52-69.Frazier, G.L., Spekman, R.E. and O’Neal, C.R. (1988),

“Just-in-time exchange relationships in industrial markets”,

Journal of Marketing, Vol. 52 No. 4, pp. 52-67.Frey, S.C. and Schlosser, M.M. (1993), “ABB and Ford,

creating value through cooperation”, Sloan Management

Review, Vol. 35 No. 1, pp. 65-72.Ganesan, S. (1994), “Determinants of long-term orientation

in buyer-supplier relationships”, Journal of Marketing,

Vol. 58 No. 2, pp. 1-19.Gardner, G. (1993), “GM gains through pain”, Detroit Free

Press, 27 February, p. 11A.Gerbing, D.W. and Hunter, J.E. (1988), ITAN: A Statistical

Package for Item Analysis with Correlational Data including

Multiple Groups Confirmatory Factor Analysis, Portland State

University, Portland, OR.Grayson, K. and Ambler, T. (1999), “The dark side of long-

term relationships in marketing services”, Journal of

Marketing Research, Vol. 36 No. 1, pp. 132-41.Gundlach, G.T., Achrol, R.S. and Mentzer, J.T. (1995), “The

structure of commitment in exchange”, Journal of

Marketing, Vol. 59 No. 1, pp. 78-92.Hakansson, H. and Snehota, I. (1995), Developing

Relationships in Business Networks, Routlege, New York, NY.Heide, J.B. and John, G. (1992), “Do norms matter in

marketing relationships?”, Journal of Marketing, Vol. 56

No. 2, pp. 32-44.Helper, S. (1991), “How much has really changed between

US automakers and their suppliers?”, Sloan Management

Review, Vol. 32 No. 4, pp. 15-28.Helper, S. and Sako, M. (1995), “Supplier relations in Japan

and United States: are they converging?”, Sloan

Management Review, Vol. 36 No. 3, pp. 77-84.Hunt, S.D. (1983), “General theories and the fundamental

explananda of marketing”, Journal of Marketing, Vol. 47

No. 4, pp. 9-17.Iacobucci, D. and Zerrillo, P. (1997), “The relationship life

cycle”, Research in Marketing, Vol. 13 No. 4, pp. 47-68.Jap, S. and Ganesan, S. (2000), “Control mechanisms and

the relationship life cycle: implications for safeguarding

specific investments and developing commitment”, Journal

of Marketing Research, Vol. 37 No. 2, pp. 227-45.Joreskog, K.G. and Sorbom, D. (1999), LISREL 8.30:

Interactive LISREL, Software International, Chicago, IL.Kobe, G. (2001), “Supplier squeeze”, Automotive Industries,

March, pp. 26-30.Krogh, H. (2004), “VW wants to keep peace with its

supplier”, Automotive News, 14 June, p. 30EE.Kumar, N.L., Scheer, L.K. and Steenkamp, J.E.M. (1995),

“The effects of perceived interdependence on dealer

attitudes”, Journal of Marketing Research, Vol. 32 No. 3,

pp. 348-56.Kumar, N.L., Stern, L.W. and Anderson, J.C. (1993),

“Conducting interorganizational research using key




Volume 23 · Number 5 · 2008 · 287–300

297

informants”, Academy of Management Journal, Vol. 36 No. 6,

pp. 1633-51.Lambe, C.J., Wittman, C.M. and Spekman, R.E. (2001),“Social exchange theory and research on business-to-

business relational exchange”, Journal of Business-to-Business Marketing, Vol. 8 No. 3, pp. 1-36.

Langfield-Smith, K. and Greenwood, M.R. (1998),

“Developing co-operative buyer-supplier relationships: a

case study of Toyota”, Journal of Management Studies,Vol. 35 No. 3, pp. 331-53.

Laseter, T.M. (1998), Balanced Sourcing: Cooperation andCompetition in Supplier Relationships, Jossey-Bass Publishers,San Francisco, CA, pp. 218-20.

Lewis, J.D. (1999), Trusted Partners: How Companies BuildMutual Trust and Win Together, The Free Press, New York,

NY.Liker, J.K. (2004), The Toyota Way, McGraw-Hill, New York,

NY.Liker, J.K. and Choi, T.Y. (2004), “Building deep supplierrelationships”, Harvard Business Review, Vol. 82 No. 12,

pp. 104-13.Lyons, T.F., Krachenberg, A.R. and Henke, J.W. Jr (1990),“Mixed marriage motives: what’s next for buyer-supplier

relations?”, Sloan Management Review, Vol. 31 No. 3,

pp. 29-36.Maloni, M. and Benton, W.C. (2000), “Power influences in

the supply chain”, Journal of Business Logistics, Vol. 21 No. 1,

pp. 49-73.Maremont, M. and Berner, R. (1999), “Leaning on suppliers,

rite-aid deducts cash at bill-paying time”, Wall StreetJournal, 31 March, p. 1.

Mohr, J. and Nevin, J.R. (1990), “Communication strategies

in marketing channels: a theoretical perspective”, Journal ofMarketing, Vol. 54 No. 4, pp. 36-51.

Mohr, J. and Spekman, R.E. (1994), “Characteristics of

partnership success: partnership attributes, communication

behavior, and conflict resolution techniques”, StrategicManagement Journal, Vol. 15 No. 2, pp. 135-52.

Mohr, J., Fisher, R.J. and Nevin, J.R. (1996), “Collaborative

communications in interfirm relationships: moderating

effects of integration and control”, Journal of Marketing,Vol. 60 No. 3, pp. 103-15.

Monczka, R.M. and Trent, R.J. (1991), “Evolving sourcing

strategies for the 1990s”, International Journal of PhysicalDistribution & Logistics Management, Vol. 21 No. 5, pp. 4-12.

Monczka, R.M., Peterson, K.J., Handfield, R.B. and Ragatz,

G.L. (1998), “Success factors in strategic supplier alliances:

the buying company perspective”, Decision Sciences, Vol. 29No. 3, pp. 553-77.

Moorman, C., Deshpande, R. and Zaltman, G. (1993),

“Factors affecting trust in market relationships”, Journal ofMarketing, Vol. 57 No. 1, pp. 81-101.

Moorman, C., Zaltman, G. and Deshpande, R. (1992),

“Relationships between providers and users of marketresearch: the dynamics of trust within and between

organizations”, Journal of Marketing Research, Vol. 29

No. 3, pp. 314-29.Morgan, R.M. and Hunt, S.D. (1994), “The commitment-

trust theory of relationship marketing”, Journal ofMarketing, Vol. 58 No. 3, pp. 20-38.

Nelson, D., Mayo, R. and Moody, P.E. (1998), Powered byHonda: Developing Excellence in the Global Enterprise, JohnWiley & Sons, New York, NY, pp. 141-68.

Nelson, D., Moody, P.E. and Stegner, J. (2001), The

Purchasing Machine, The Free Press, New York, NY.Pryweller, J. (1999), “Lear demanding retroactive rebates”,

Automotive News, 25 October, p. 52.Reid, D.C. and Plank, R.E. (2000), “Business marketing

comes of age: a comprehensive review of the literature”,

Journal of Business-to-Business Marketing, Vol. 7 Nos 2/3,

pp. 9-185.Rosenberg, L.J. and Stern, L.W. (1970), “Toward the analysis

of conflict in distribution channels: a descriptive model”,

Journal of Marketing, Vol. 34 No. 4, pp. 40-6.Sako, M. and Helper, S. (1998), “Determinants of trust in

supplier relations: evidence from the automotive industry in

Japan and the United States”, Journal of Economic Behavior

and Organization, Vol. 34 No. 3, pp. 387-417.Sherefkin, R. (1999), “Visteon demanding major price cut”,

Automotive News, 20 September, p. 3.Sherefkin, R. (2003), “DCX mandate: ‘world prices’”,

Automotive News, 16 June, p. 1.Sherefkin, R. and Armstrong, J.C. (2003), “Suppliers prefer

Japanese”, Automotive News, 12 May, p. 1.Sheth, J.N. and Parvatiyar, A. (2000), “The evolution of

relationship marketing”, in Sheth, J.N. and Parvatiyar, A.

(Eds), Handbook of Relationship Marketing, Sage, London.Sheth, J.N. and Sharma, A. (1997), “Supplier relationships,

emerging issues and challenges”, Industrial Marketing

Management, Vol. 26 No. 2, pp. 91-100.Shirouzu, N. (2003), “Ford and GM put the squeeze on parts

suppliers for price cuts”, Wall Street Journal, p. A3, 18

November.Smeltzer, L.R. (1997), “The meaning and origin of trust in

buyer-supplier relationships”, International Journal of

Purchasing and Materials Management, Vol. 33 No. 1,

pp. 40-8.Spekman, R.E. (1988), “Strategic supplier selection:

understanding long-term buyer relationships”, Business

Horizons, Vol. 31 No. 4, pp. 75-81.Spekman, R.E. (2000), “A commentary on business

marketing: a twenty year review and an invitation for

continued dialogue”, Journal of Business-to-Business

Marketing, Vol. 7 No. 4, pp. 11-32.Stallkamp, T.T. (2005), SCORE! A Better Way to Do Business:

Moving from Conflict to Collaboration, Wharton School

Publishing, Upper Saddle River, NJ.Stern, L.W. and Reve, T. (1980), “Distribution channels as

political economies: a framework for comparative analysis”,

Journal of Marketing, Vol. 44 No. 3, pp. 52-64.Stuart, I. and McCutcheon, D. (1995), “Problem sources in

establishing strategic supplier alliances”, International

Journal of Purchasing and Materials Management, Vol. 31

No. 1, pp. 3-9.Wilson, D.T. (1995), “An integrated model of buyer-seller

relationships”, Journal of Academy of Marketing Science,

Vol. 23 No. 4, pp. 335-45.Wilson, D.T. (2000), “Commentary: thoughts on the future

of business marketing”, Journal of Business-to-Business

Marketing, Vol. 7 No. 4, pp. 33-43.Zaheer, A., McEvily, B. and Perrone, V. (1998), “The

strategic value of buyer-supplier relationships”,

International Journal of Purchasing and Materials

Management, Vol. 34 No. 3, pp. 20-6.




Volume 23 · Number 5 · 2008 · 287–300

298

Appendix

About the authors

John W. Henke Jr is Associate Professor of Marketing in theSchool of Business Administration at Oakland University(Rochester, MI). Prior to joining the academic community, heheld sales and marketing management positions during a 15-year period with several firms, including the IBMCorporation, Data Processing Division, and the AutomotiveDivision of General Automation, an internationalmanufacturer of automated industrial processes. His degreesinclude a BA (physics) from Eastern Michigan University, aMS (radiological physics) from Cornell University, and aMBA (marketing) and PhD (marketing) from Michigan StateUniversity. While at Cornell he was the recipient of a Sloan-Kettering Fellowship. He has also received several automotiveindustry research grants from the MIT International MotorVehicle Program. John W. Henke Jr is the correspondingauthor and can be contacted at: [email protected] Parameswaran is Chair of the Management and

Marketing Department and Professor of Marketing,International Business and MIS in the School of BusinessAdministration at Oakland University (Rochester, MI). He isalso the Director of the Center for International BusinessInitiatives in the School of Business Administration. His

educational qualifications include a PhD in marketing fromGeorgia State University, a Master’s degree in BusinessInformation Systems also from Georgia State, and a Master’sdegree in International Management from Thunderbird, theGarvin School of Global Management in Glendale, Arizona.His Bachelor of Science degree is in Physics and Mathematicsfrom Bombay University in India. His work experienceincludes 7 þ years in industry working for advertisingagencies, and pharmaceutical and automobile firms. Histeaching experience spans nearly 30 years in Georgia, Indianaand Michigan. Professor Parameswaran’s research interestsinclude marketing measurement, cross-cultural marketing andinternational business research, and group and decisionsupport systems.R. Mohan Pisharodi is Associate Professor of Marketing in

the School of business Administration at Oakland University(Rochester, Michigan) and a Distinguished InternationalFaculty Member at Alliance Business Academy, Bangalore,India. He holds MBA degrees from University BusinessSchool (Panjab University) and the Richard Ivey School ofBusiness (the University of Western Ontario), and a PhDfrom the University of Tennessee. He has been on the facultyof Virginia Tech, the Ohio State University, and theUniversity of Michigan and is among the Board of Directors

Figure A1 Survey items




Volume 23 · Number 5 · 2008 · 287–300

299

of Detroit American Marketing Association. Dr Pisharodi wasselected as Oakland University Faculty Advisor of the Year in2002 and was the recipient of the Paul F. Lorenz TeachingExcellence Award in 2003 and the Distinguished ServiceAward in 2005. His research interests include logistics, supplychain management, distribution, international marketing andrelationship marketing.

Executive summary and implications formanagers and executives

This summary has been provided to allow managers and executivesa rapid appreciation of the content of the article. Those with aparticular interest in the topic covered may then read the article intoto to take advantage of the more comprehensive description of theresearch undertaken and its results to get the full benefit of thematerial present.

No one is happy when someone tells them they have got to dothe same for less. Especially if they feel they are already givinggood value, and maybe even looking for a price risethemselves. Being told it is a price drop to look forward tocan come as a shock, especially when they have what theythink is a trusting and co-operative relationship with theircustomer. In manufacturing, no guessing what a supplier’sreaction will be when the manufacturer demands a cut.Or, rather, there is plenty of guessing as it is proving

difficult for researchers to accurately predict what happenswhen a powerful partner uses pressure in this way. However,as in other walks of life, it is often not what you do but the waythat you do it that prompts either an angry or anunderstanding reaction. An diplomatic attempt at mutualunderstanding goes a long way.Hopefully, the automobile manufacturing industry’s

purchasing lieutenants have come a long way in the tactdepartment in the 15 or so years since GM’s J. Ignacio Lopezde Arriortua was feared and loathed by suppliers for what theysaid was a heavy handed way of reducing GM’s parts bill byseveral billions of dollars a year. Suppliers accused him ofusing dubious tactics to cajole and threaten them, of short-term fixes, and of wrecking the trust that is needed in suchbusiness relationships.Mr Lopez’s use of adversarial tactics were not exactly the

issue. The lengths he went to in using them was. Adversarialtactics are a common approach on which manufacturers havehistorically relied to get suppliers to meet their price reductionexpectations. Many have since realized that more benefitsresult from co-operative, rather than adversarial, supplierrelations. The benefits of co-operative relationships can besubstantial. Then again, the price reduction outcomes ofadversarial relations cannot be easily dismissed.The need for manufacturers to maintain a competitive

position in an increasingly competitive market place makesthe achievement of lower prices, or at least maintaining priceswhile providing greater value, an absolute necessity invirtually every industry. At the same time, manufacturersneed the competitive advantage that results from havingtrusting supplier working relations.

John W. Henke et al. say the academic literature provides noclear direction to the interaction of manufacturer pricereduction pressure and the working relations with thepressured suppliers. Consequently, they bring their longexperience working with large manufacturers and theirsuppliers in a variety of North American and Europeanindustries in a study of suppliers to the six major NorthAmerican automotive giants, Chrysler, Ford, General Motors,Honda, Nissan, and Toyota. And they conclude by assuringmanagers that two seemingly incompatible approaches –pressuring suppliers for price reductions and maintainingtrusting relations with the pressured suppliers – can occurconcurrently.With increasing global pressure on manufacturers to

maintain, if not lower, costs while increasing the value oftheir end product, they cannot do this alone. And with morethan 50 per cent of the costs attributed to suppliers, onaverage, manufacturers must also involve these suppliers in amanner that will enable the suppliers to maximize theircontribution to the manufacturer’s competitive advantage,while responding to the manufacturer’s price reductionpressure.Suppliers must realize that marketplace competitiveness

virtually demands that their customers continually pressurethem for price reductions. In fact, price reduction pressure onsuppliers must occur, for low procurement costs are animportant element in helping ensure a manufacturermaintains its competitive advantage in the marketplace.Subsequently, if a supplier is providing goods to amanufacturer that is working to develop and maintaintrusting working relations with its suppliers, the suppliershould not expect that these actions preclude themanufacturer from also applying price reduction pressures.Suppliers must recognize that these conditions –

manufacturer customers working toward trusting supplierrelationships and manufacturer price reduction pressures –when applied simultaneously ultimately benefit both parties.As for the manufacturers, while they can continually

improve the efficiency of their internal operations, they cannothope to remain competitive without also involving theirsuppliers. One approach to involving their suppliers increating value for their end-customers, is for manufacturersto apply considerable price reduction pressure on theirsuppliers. Another approach is to develop trusting workingrelations with their suppliers.This research found that manufacturers can pressure

suppliers for price reductions while having trusting workingrelations with these same pressured suppliers. The pressure,however, must be accompanied with actions that reinforce thesuppliers’ perception that the manufacturer wants and isworking conscientiously on developing and maintainingtrusting working relations with its suppliers. These actionsinclude the manufacturer being sincere and fair in the mannerit works with its suppliers, and sharing timely and informativeinformation, openly and honestly.

(A precis of the article “Manufacturer price reduction pressure andsupplier relations”. Supplied by Marketing Consultants forEmerald.)




Volume 23 · Number 5 · 2008 · 287–300

300

To purchase reprints of this article please e-mail: [email protected]

Or visit our web site for further details: www.emeraldinsight.com/reprints

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Documents

Manufacturer price reduction pressure and supplier … · Manufacturer price reduction pressure and supplier relations John W. Henke Jr, Ravi Parameswaran and R. Mohan Pisharodi School