Capturing value creation in business relationships: A customer perspective

Transcription

1 Industrial Marketing Management 32 (2003) Capturing value creation in business relationships: A customer perspective Wolfgang Ulaga* Department of Marketing, Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46656, USA Marketing Department, ESCP-EAP, 79 avenue de la République, Paris, Cedex 11, France Received 1 April 2003; received in revised form 1 June 2003; accepted 2 June 2003 Abstract Collaborative relationships in business markets are of growing importance to customers and suppliers alike. Customers need to decide whether to invest in a new supplier relationship, to maintain and develop a valued relationship, or to divest from a low-value relationship. Suppliers, in turn, face growing commoditization of products and seek to differentiate themselves through relationships. The measurement of value creation in buyer seller relationships is still in its infancy, and a sound understanding of how firms create and deliver value in business relationships is needed. Emerging studies investigate relationship value based on dimensions derived from theory and lack a managerial perspective. Therefore, the present research explored relationship value from a grounded theory perspective. In-depth interviews with purchasing managers identified eight value drivers in manufacturer supplier relationships. Implications for the measurement of the concept are discussed, and directions for further research are suggested. D 2003 Elsevier Inc. All rights reserved. Keywords: Buyer seller relationships; Customer value; Relationship value; Grounded theory 1. Introduction There is a growing recognition that collaborative relationships in business markets offer significant opportunities for companies to create competitive advantages and achieve superior results (Hewitt, Money, & Sharma, 2002; Jap, 1999; Lyons, Krachenberg, & Henke, 1990). In many business markets, manufacturers reduce the overall number of companies in their supply base and focus on closer relationships with key suppliers. Consequently, when assessing their supplier portfolio, customers need to decide when to invest in a specific supplier relationship, when to maintain and develop existing relationships, or when to divest from underperforming relationships. Many suppliers, in turn, face a growing trend towards commoditization of products (Rangan & Bowman, 1992).In search of beating the commodity magnet, they increasingly turn toward new ways of differentiating themselves * Department of Marketing, Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46656, USA. Tel.: , ; fax: , addresses: [email protected], [email protected] (W. Ulaga). through improved customer interactions (Vandenbosch & Dawar, 2002). As a consequence, suppliers also need to understand how they can create and deliver value in business-to-business relationships. The measurement of value creation in buyer seller relationships is still in its infancy, and a sound understanding of the concept is a prerequisite for developing reliable and valid assessment tools (Eggert & Ulaga, 2002; Ulaga, 2001). Emerging studies investigate relationship value based on dimensions derived from theory. However, a sound conceptualization grounded in managerial practice is missing. The present research attempts to close this gap by exploring relationship value from a grounded theory perspective. To work towards this goal, the rest of the paper is structured as follows: First, we position our research within the emerging literature on relationship value. Next, we describe our research methodology. We conducted ten in-depth interviews with purchasing managers in nine manufacturing companies located in the Midwest of the United States. Analysis and interpretation of results identified eight value drivers in supplier relationships. Finally, we discuss implications for measuring relationship value and provide directions for further research /$ see front matter D 2003 Elsevier Inc. All rights reserved. doi: /j.indmarman

2 678 W. Ulaga / Industrial Marketing Management 32 (2003) Relationship value Exchange has been accepted as a core concept of the marketing discipline (Bagozzi, 1975; Hunt, 1991). In fact, most current definitions of marketing explicitly include exchange in their formulations (Kotler & Armstrong, 2001). Market exchanges take place because all parties involved expect to gain value in the exchange. Therefore, value has always been the fundamental basis for all marketing activity (Holbrook, 1994). While the marketing literature contains a variety of definitions stressing different aspects of the concept, four recurring characteristics can be identified: (1) Customer value is a subjective concept (Kortge & Okonkwo, 1993); (2) it is conceptualized as a trade-off between benefits and sacrifices (Zeithaml, 1988); (3) benefits and sacrifices can be multifaceted (Grisaffe & Kumar, 1998); and (4) value perceptions are relative to competition (Gale, 1994). In short, customer value is generally defined as the trade-off between the benefits ( what you get ) and the sacrifices ( what you give ) in a market exchange (Zeithaml, 1988). Most research on customer value adopts a transactional approach focusing on product-related issues, neglecting relational dimensions of customer-perceived value (Dwyer & Tanner, 2002; Parasuraman & Grewal, 2000). In reviewing the value literature and its implications for relationship marketing, Payne and Holt (1999) state that the most recent development has been to consider customer value from the viewpoint of relationship marketing. This is described as relationship value. The conceptual roots of the relationship value construct lie in business and services marketing. Anderson, Jain, and Chintagunta (1993) define value in business markets as the perceived worth in monetary units of the set of economic, technical, service, and social benefits received by a customer firm in exchange for the price paid for a product offering, taking into consideration the available alternative suppliers offerings and prices. Their definition represents one of the first efforts to identify and categorize the relational dimensions of the value construct, namely, social and service benefits. Wilson and Jantrania (1995) examine the creation of value in industrial buyer supplier relationships. Based on conceptual research, they develop a three-dimensional categorization of relationship value: economic, strategic, and behavioral value. Though they expect substantial difficulties in an empirical assessment of the overall value proposition as perceived by customers in a business relationship, they conclude that relationship value is a problematic concept which cannot be ignored. Ravald and Grönroos (1996) develop a generally applicable framework of value perception in exchange relationships. They point out that the trade-off between benefits and sacrifices in long-term-oriented exchange processes is not restricted to the single episode level. Rather, value assessments should take into account both episode and relationship benefits and sacrifices. Elsewhere, Grönroos (1997) distinguishes between two benefit and two sacrifice dimensions. Customer-perceived value can be described as core solution plus additional services divided by price and relationship costs or core plus/minus added value. According to Tzokas and Saren (1999), the major contribution of this framework is to bring into the picture the costs and benefits associated with the relationship itself as determinants of the overall value perceived by the customer. More recently, Möller and Törrönen (2003) suggest to conceptualize value in a supplier customer relationship along three dimensions: the supplier s efficiency function, the effectiveness function, and the network function. The efficiency function refers to the efficacious use of resources in a business relationship. Effectiveness refers to an actor s ability to invent and produce solutions that provide more value to customers than existing offers. The network function finally takes into account the potential of value creation in the larger network beyond the dyadic supplier customer relationship. Empirical research focusing on relationship value in business markets from a customer perspective is limited to a few studies. Based on data collected among providers of information, communication, entertainment, and financial services, Lapierre (2000) identified 13 drivers of relationship value and grouped them into three benefit dimensions (product, service, and relationship benefits) as well as two sacrifice dimensions (price and relationship costs). Data collection in Lapierre s study was restricted to business-tobusiness services. Consequently, the findings of Lapierre s study cannot be generalized to industrial buyer seller relationships. In addition, the conceptualization of relationship value in her study included a number of marketing variables, for example, trust and solidarity, which the marketing literature typically considers as distinct constructs. Such a conceptual overload may pose significant problems of discriminant validity. Walter, Müller, Helfert, and Ritter (2003) surveyed 230 purchasing managers in German manufacturing companies. The authors suggest four main dimensions of value creation in a buyer seller relationship labeled cost function, quality function, volume function, and safeguard function. In addition, four indirect functions complement a supplier s potential of value creation in a business relationship: the market function, the scout function, the innovation development function, and the social support function. Table 1 summarizes the emerging body of research on relationship value. A careful review of these conceptualizations raises three important issues. First, although some common dimensions emerge, the proposed constituents of relationship value vary considerably among these definitions. Second, most dimensions are only described in very broad terms and do not provide a clear understanding of their underlying facets (i.e., strategic benefits or relationship costs ). Finally, no guidelines are provided as to how

3 W. Ulaga / Industrial Marketing Management 32 (2003) Table 1 Conceptualizations of relationship value Authors Benefit dimensions Sacrifice dimensions Comments Anderson et al. (1993); Anderson and Narus (1995, 1999) Wilson and Jantrania (1995) Ravald and Grönroos (1996) economic benefits, technical benefits, service benefits, social benefits price theory-based economic benefits, strategic benefits, behavioral benefits none theory-based episode benefits, relationship benefits episode sacrifices, theory-based relationship sacrifices Grönroos (1997) core solution, additional services price, relationship costs theory-based Lapierre (2000) product-related benefits, service-related price, relationship-related benefits, relationship-related benefits sacrifices survey of 209 and 129 purchasing managers in the Canadian IT and finance sectors Möller and Törrönen efficiency function, effectiveness theory-based (2003) function, network function Walter et al. (2003) direct functions: direct function survey of 230 purchasing managers quality cost reduction in German manufacturing companies volume safeguard indirect functions: market function scout function innovation function social support function these dimensions could be combined to form an overall measure of relationship value. When investigating relationship value, researchers may draw on the existing literature on vendor performance evaluation in industrial marketing (Hutt & Speh, 2001), purchasing (Lehmann & O Shaughnessy, 1982; Timmerman, 1986), and supply chain management (Monczka, Trent, & Handfield, 2002). For example, Hutt and Speh (2001) mention key criteria such as quality, service, and price. Similarly, Timmerman (1986) describes how multiattribute models may be used to monitor supplier performance. Supply Chain Management texts also provide information on how to evaluate supplier performance. For example, Monczka et al. (2002) suggest two categories of measures when monitoring supplier performance. According to the authors, objective (quantitative) measures refer to three categories: delivery performance, quality performance, and supplier cost reduction. In turn, subjective (qualitative) measures include factors such as the supplier s problem resolution ability, technical ability, progress reporting, corrective action response, cost-reduction ideas, new-product support, and buyer seller compatibility. Based on these findings, the objective of our research is to address the three shortcomings of previous conceptualizations of relationship value and to explore the concept from the perspective of how customers actually view value creation in a supplier relationship. Consequently, we suggest to ground the investigation of relationship value in the language of relationship managers. This approach complements our exiting knowledge and offers new insights for a better understanding and measurement of the construct. In line with this objective, we propose a qualitative methodology in this research. 3. Methodology 3.1. Grounded theory Researchers have recommended the use of qualitative methods (1) to explore phenomena about which little is known or (2) to gain novel understandings about existing phenomena (Stern, 1980). In addition, qualitative approaches can be used to obtain the intricate details about a specific phenomenon under investigation (Strauss & Corbin, 1998). Among the many types of qualitative research methodologies, grounded theory was first presented by Glaser and Strauss (1967) in an attempt to bridge the gap between theoretically uninformed empirical research and empirically uninformed theory, by grounding theory in data (Charmaz, 1983; Goulding, 1998). Strauss and Corbin (1998) define grounded theory development as a process whereby theory is derived from data, systematically gathered and analyzed through the research process. Thus, grounded theory offers new insights and a better understanding of phenomena by the researcher. The present research was designed to investigate the meaning of the construct s various dimensions, especially as research on this construct is still at an early stage. The profound understanding of relationship value and its facets provides the foundations for developing sound measures of the concept Data collection and analyses Sampling procedure Data were gathered through in-depth interviews with purchasing managers in manufacturing companies located

4 680 W. Ulaga / Industrial Marketing Management 32 (2003) in the Midwest of the United States. Companies were contacted through the local Chapter of the Institute of Supply Management (ISM) and through the alumni network of a Midwestern University. Based on these two sources, 21 purchasing professionals were identified. The managers were contacted by telephone and invited to participate in the study. Ten managers agreed to participate, and interviews were scheduled over a period of three months Unit of analysis The unit of analysis for the present research was a specific collaborative manufacturer supplier relationship. As the present study aimed at identifying the variety of underlying relationship value dimensions in business markets, a sample of relationships from different manufacturing industries was required. At the same time, key manufacturing characteristics of participating companies had to allow for comparability across the participating firms. Consequently, companies in batch-processing assembly industries were contacted (SIC Codes 34 38) Informants Participants were influential decision-makers involved in selecting and monitoring the supplier relationship. The selection of key informants involved in the manufacturer supplier relationship was critical in the process of identifying and describing value-creating relationship dimensions. Consequently, only senior-level participants were invited to participate in the study Sample characteristics The final sample consisted of manufacturers in a variety of areas, such as aircraft landing systems, amplifiers and microphones, audiovisual projection equipment, automobiles, braking systems, electronic components, household appliances, orthopedic products, and vacuum pumps. Products considered by participants also varied significantly. Customers purchased aluminum wheel forgings, car seats, electronic components, motors, pins, springs, and surgical instruments. The size of participating companies ranged from smalland medium-sized manufacturers to multinationals, employing a workforce between 400 and 348,000. The selected buyer supplier relationships had been in place between 2 and 25 years. The final sample consisted of ten participants from nine manufacturing companies. The sampling process ceased when saturation was reached, indicated by information redundancy. Table 2 summarizes the main characteristics of the sample used in the present study Interview guide The interview guide was composed of three parts. In the first part, participants were asked to select a specific product they purchased from at least two suppliers. Respondents were further asked to describe in detail the product, how it was used in the manufacturing process, its relative importance in the final product, and the demand and supply context. The selected product had to be an important component, unlike a commodity or a MRO product, for which the customer maintained a collaborative relationship with suppliers. Participants were asked to specify why they considered a particular relationship to be collaborative, and indicators from the literature such as idiosyncratic investments or coordination efforts (Jap, 1999) were used to ensure that all participants had a close manufacturer supplier relationship for a key component in mind. The purpose of this initial stage was to ask the respondent to consider a specific use situation and to prepare for a comparison of alternative buyer supplier relationships. The second part was designed to identify the different relationship value dimensions. Respondents were asked to describe how suppliers create value for their organizations, and to illustrate the different directions of value creation through examples from the specific supplier relationship under consideration. To facilitate the process, participants were asked to describe activities between the supplier and the manufacturer, which then allowed the interviewer to probe into the different benefits and costs perceived in the relationship. Particular attention was given to the comparison of each company s main supplier and, where possible, its second-best alternative supplier of the same product. Finally, in the third part of the interview guide, participants were invited to describe their company and their own background. As the empirical study relied completely on the perceptions of key informants, it was important that respondents were competent to report on the different dimensions of relationship value. Variations in respondents background, position, knowledge, and perceptions of the relationship potentially influence their competency and knowledge of the relationship dimensions under investigation. Hence, the interview guide contained a final set of questions referring to the respondents position and tenure with the company Analysis and interpretation Interviews lasted approximately h. Each interview was audiotaped and verbatim transcribed. When possible, the interviews were supplemented by plant tours and documents provided by participants. Analyses of the verbatim interview transcripts followed traditional grounded theory guidelines (see, e.g., Flint, Woodruff, & Gardial, 2002). After the first few interviews, analyses were started early to allow for interpretations to inform and direct subsequent interviews. Grounded theory coding was used, that is, open, axial, and selective coding, to identify the different relationship value drivers and their subdimensions (Strauss & Corbin, 1998).

5 W. Ulaga / Industrial Marketing Management 32 (2003) Table 2 Study sample Participant name Company activity Company size Product purchased Frank: Business Manager e-procurement, 12 years in industry, 4 years in purchasing, 4 years in e-business, age 35 Scott: Director Global Commodities, 6 years in engineering, 7 years in purchasing, age 38 Jeff: Senior Purchasing Supervisor, 13 years in purchasing, age 38 Jack: Director of Purchasing, 25 years in production control and purchasing, age 45, and Shawn: Project Manager Global Sourcing, 4 years in purchasing, age 28 Richard: Director, Strategic Sourcing, 18 years in purchasing, age 40 John: Purchasing Manager, 16 years in purchasing, 3 years in production planning and control, age 38 Jerry: Purchasing Manager, 9 years in purchasing, 19 years in production planning and inventory control, age 50 Mary: Purchasing Manager, 25 years in purchasing, quality control, age 45 Denice: Contract Administrator Supervisor, 22 years in purchasing, age 42 automobiles household appliances automotive brakes aircraft landing systems orthopedic reconstructive implants electric sensors video-projection equipment and audiovisual support products vacuum pumps amplifiers sales: $177 billion, employees: 347,700 sales: $11 billion, employees: 59,408 sales: $6.2 billion (division), employees: 21,750 (division) sales: $9.7 billion (division), employees: 37,500 (division) sales: $1.2 billion, employees: 3600 sales: $458 million, employees: 5313 sales: $110 million, employees: 500 sales: $82 million, employees: 400 sales: $75 million, employees: 450 All participants are key decision-makers in the purchasing departments of their firms. Names are pseudonyms. interior for a specific vehicle; one system supplier, four potential alternative suppliers electric motors; two main suppliers, multiple secondary suppliers pins; one major supplier (95%) aluminum forgings for aircraft wheels; one major supplier (90%), one alternative supplier (10%) surgical instruments; two major supplier, 60 suppliers for product category overall circuit boards, one major supplier (80%), one alternative supplier (20%) springs; one sole supplier electric motors; two main suppliers standard electronic components; one main supplier, several other suppliers Assessment of trustworthiness The trustworthiness of the present research findings was assessed by applying the techniques of triangulation, informant feedback, and replication recommended by Miles and Huberman (1994). In a first step, the verbatim interviews were contentanalyzed by two additional researchers who had not previously participated in the interviews. The researchers independently developed their relationship value drivers and subdimensions using the same material and procedures as the main researcher. In a second step, results of all three researchers were compared to identify those areas where they disagreed. All three researchers consistently identified the eight generic value drivers. However, differences existed in terms of (1) the labeling of each dimension and (2) the attribution of subdimensions to value drivers. To resolve the abovementioned problems of labeling and correct assignment of subdimensions to each of the eight value drivers, feedback from study participants was gathered in a third step (Denzin, 1978) and adjustments were made. Finally, the study s methodology and findings were presented during a workshop with 27 purchasing managers of the local Chapter of the ISM. Participants received a description of the value dimensions and were asked to comment on how well they reflected their practice and whether they recommended changes. Only a few changes in wording and illustrations of value drivers were made after this final step. 4. Results Eight dimensions of value creation in manufacturer supplier relationships emerged from our interviews with purchasing managers (Fig. 1). In this section, the relationship value drivers and their dimensions are discussed in detail.

6 682 W. Ulaga / Industrial Marketing Management 32 (2003) Fig. 1. Relationship value drivers Relationship value Dimension #1: product quality Above and beyond all other aspects, manufacturers maintain relationships with suppliers to source products and services needed in their transformation process (Homburg & Rudolph, 2001). The participants in our study consistently report that it has become increasingly difficult for suppliers to differentiate themselves from competition merely on the basis of product quality. Quality is a given, and suppliers must meet quality standards to be included in the supply base. In most cases, quality or engineering departments are asked by purchasing to preselect suppliers, which are then added to a pool of qualified suppliers. The companies mainly search for technical performance and reliability when referring to product quality. The supplier s products are expected to meet a set of technical specifications within certain tolerance levels: John: For a circuit board, we look for a specific output. We want to make sure there are no cracks in the hybrids. None of the parts must be skewed on the circuit board. The part has to be dimensionally and electrically correct per a set of specifications. We gave the supplier a drawing that outlines the physical dimensions, the distances between the pads, where the capacitors are supposed to be, where the traces are. And then there are the electrical specifications the supplier has to meet, that is, the output this circuit board has to produce. The participants also mention the importance of delivering consistent quality levels over time. In the example of a spring supplier, Jerry recently switched suppliers because the previous supplier delivered inconsistent quality. He found significant variations in the characteristics of springs received. The supplier was unable to solve the problem and had to be replaced by an alternative springs manufacturer. Jerry: We switched supplier of springs last year. With the previous supplier, we were having too much variations. When we went back to the supplier to ask him to help us improve the situation, we found out, through interviewing and his answers to us, that he didn t have the technical capabilities to help us. Several participants in our study underline the pressure for a continuous improvement of quality levels. Being at the cutting edge of product quality is especially mentioned in our interviews in the automotive and household appliances industries. The following passage illustrates this issue: Scott: One of the key elements of a supplier relationship is having the best-in-class quality for the components that they supply and understanding the system that the component goes into so that they know the implications of their product in the functionality of our product. We expect suppliers to work with us and try to continuously drive quality. As you see more European and Asian products come into our country, the bar gets raised all the time, and you have to benchmark yourself against different competitors than those you had in the past.

7 W. Ulaga / Industrial Marketing Management 32 (2003) Most of the companies in our study have implemented incoming inspections for product quality using quantitative measures, such as the number of shipments rejected, as opposed to the total number of shipments received or Parts per Million (PPM) to periodically review suppliers product quality. Some even have implemented supplier certification programs, thus abandoning incoming inspections at their facilities. When quality problems occur, several participants mention that their organization will work with the supplier to improve product quality levels through Supplier Development Programs composed of members from both the supplier s and customer s organization. Jeff: Actually, we set an internal standard, like a PPM level (Parts per Million), at the beginning of the year. We work with every supplier that doesn t hit the target through our Approved Supplier Development Programs. We go in and find out what problems they have. In some instances, our Supplier Quality Group actually helps them to develop test procedures, to find the latest technology, to help them fix issues on the line. Quality is a major component, but we do help them out in identifying where they can improve. Recurring quality problems over time strain the relationship and ultimately may result in discontinuing the relationship, especially if the supplier is unable to solve quality issues. The following passage from Jack s interview illustrates this point: Jack: Most of [our suppliers] are all delivering a quality product. If suppliers are not delivering a quality product, we get rid of them. In fact, we had a supplier from Mexico, and we tried to work with them on quality problems for a long time. But then, we recently made a decision they were never going to be up to our quality standards at least not in the near terms. So we decided to take them off the list and go somewhere else. Based on these findings, we identify product quality as a key driver of relationship value. In line with previous research (Crosby, 1979; Juran, 1974; Ulaga & Chacour, 2001), we define product quality as the extent to which the supplier s product meets the customer s specifications. Key aspects of product quality are performance, reliability, and consistency over time. Typical measures across industries are Returns or PPM Relationship value Dimension #2: service support In many business markets, suppliers provide a blend of tangible products and a range of accompanying service elements (Hutt & Speh, 2001; Levitt, 1981). These service components play an important role in differentiating a supplier s offering (Anderson & Narus, 1995). Beyond product-related services, such as product warranty and availability of spare parts, the participants in our study mention a number of additional services. Suppliers need to provide the right information at the right time. This value driver of customer information has several facets. First, manufacturers expect to get a hold of suppliers whenever needed (supplier availability). Richard, director of strategic sourcing for a medical equipment manufacturer, illustrates this value driver: Richard: Their presence brings value to us. They either have to be here, or we need to be able to get a hold of them. If changes need to be made, their quick response is paramount. When we design instruments, we will take several prototypes and go out to do cadaver studies with a few doctors to critique the instruments. If we need major design changes, they have to be able to stop, regroup, and respond with those design changes. In addition to supplier availability, our participants voice their need to receive appropriate information (information appropriateness). When changes occur, suppliers are expected to follow through in a timely manner. Speed of information may represent a competitive advantage, as illustrated in the following passage: Jeff: We get requests for changes from our customers all the time. Sometimes we need to get back to them within a few days. It s almost like a love hate relationship with our customers. There are not many carmakers out there. You need their business. It is kind of hard to not be hard on our supply base. As much as we are getting pushed, we need to push them, and it just trickles down. It is a domino effect. (...) Details are important. If we get a request for a quote from Ford, and our supplier just gives us a number on a paper, it doesn t help us out. Details are important, because Chrysler and Ford always break everything down. A third component within this dimension is the possibility of outsourcing tasks to suppliers such as assembly, design work, and product testing. Assembly is an area of major concern to manufacturers. The purchasing professionals we interviewed mention three main vectors of value creation in outsourcing assembly tasks to suppliers illustrated in the following passages from the interview with a major car manufacturer. First, suppliers create value for their customers through consolidating the supply base. By delivering integrated systems as opposed to single parts, suppliers reduce the number of outside companies that the customer needs to coordinate. Frank: Consolidation in the supply base is one way in which the suppliers are creating value. For the [car model], we looked at suppliers that could provide an entire interior, so this meant that they would be supplying the instrument panel, the floor consol, the overhead system, the door panels, the side wall trim, garnish, the rear shelf and even the carpeting.

8 684 W. Ulaga / Industrial Marketing Management 32 (2003) Second, synchronizing both the supplier s and the customer s production schedules allows to deliver parts in a sequenced manner and to reduce inventories. Frank: We try to make our assembly plants as lean as possible. We try to reduce the amount of inventory in the plants and the time it takes to make vehicles. So one of the things we do is to sequence parts. We ask suppliers to ship parts in a certain order as to how we are going to assemble our cars. We shift some of our space requirements to the supplier. They need to be able to schedule how they are going to manufacture their products, so they have enough parts and put them in the right order. And when we need them, they will pull them out and put them in the right order to send to our plant. There are additional labor, space and scheduling requirements on the part of the supplier. This means substantial savings because the assembly line worker only needs to go to the next spot and pick up the part. This could be for colors, but also for other parts, say air conditioning systems. You have less modules to chose from, less chance to make a mistake too by the worker on the assembly line. Finally, outsourcing subassembly tasks to the supplier represents a third benefit for manufacturers, liberating plant space that can be allocated to other activities. Frank: In many cases suppliers take on some of the subassembly operations. Their facilities are close to our assembly plants which leads to large reductions in plant space. So we can either build more vehicles, have more lines, or reduce the time that it take to build a vehicle. Consequently, service support can be regarded as a second key dimension of relationship value. In addition to providing product-related services, suppliers create value in two main service support areas: customer information and outsourcing of activities Relationship value Dimension #3: delivery performance The purchasing managers in our study identified delivery performance as a third dimension of relationship value. This is consistent with the business marketing literature, which describes delivery as a major criterion in supplier evaluation (Hutt & Speh, 2001). In all but two interviews, quality, service, and delivery were mentioned on topof-mind as important value drivers in a manufacturer supplier relationship. But what exactly do manufacturers value when considering a supplier s delivery performance? Not meeting delivery schedules results in significant coordination problems for customers, and, ultimately, in additional costs for premium freight charges. Frank, head of e-procurement, describes the consequences of late deliveries in the car industry. Frank: Another issue is on-time delivery of parts. We try to streamline how much inventory we have in the plants and in transit as much as possible. If the suppliers are not meeting their schedules in a timely fashion, that causes a big hiccup and may result in premium freight to get parts here, and the supplier would have to pay for it if they were at fault. It also causes problems for us because we need to call and make sure that we have parts there. We may have to send somebody to help the supplier. There are additional costs on us if we have suppliers who are not meeting their schedules. (...) Basically, delivering the right part at the right time in the plants, and in the after market as well, are our main requirements. If delivery requirements change, manufacturers expect their supplier to adjust to these modifications (delivery flexibility). Such changes in delivery schedules may occur due to spikes in demand or changes in the mix of products delivered. The supplier s responsiveness when emergency deliveries are needed is highly valued by manufacturers. Jack: You will notice the supplier that are your best friends and are customer-focused. When you are down because someone didn t count the parts right or there was a mistake in the inventory, you call them up and say We are shut down, we need these parts tomorrow, how soon can you get it to us? A lot of supplier will turn their shop around for you. And they will drive parts in here from Ohio or Chicago. So they can keep us running. Those are the things that really stick in your mind. Suppliers that go above and beyond what a typical supplier will do. Flexible adjustments are particularly important as manufacturers increasingly shorten delivery cycles through justin-time delivery. As a consequence, suppliers are expected to keep safety stocks or locate warehouses close to the customer s facilities. Finally, participants mentioned accuracy of delivery. Delivering the right parts, that is, minimizing missing or wrong parts in shipments saves time and effort for the customer. In summary, delivery is a third relationship value driver in business-to-business relationships. Suppliers create value in this area by consistently meeting delivery schedules (ontime delivery), their capability to adjust to changes in delivery schedules (flexibility), and their capacity to consistently deliver the right parts (accuracy) Relationship value Dimension #4: supplier know-how In many industries, manufacturers turn to suppliers to help them achieve a stronger competitive position (Ganesan, 1994), and recent research suggests that manufacturer supplier relationships represent a strategic resource to gain competitive advantages (Hogan & Armstrong, 2001; Jap, 1999; Wernerfelt, 1984). What are the critical resources customers seek to access in a supplier relationship? Kalwani and Narayandas (1995) state that manufacturers search to gain access to the supplier s resources, skills, and strength in long-term manufacturer supplier relationships.

9 W. Ulaga / Industrial Marketing Management 32 (2003) Suppliers may hold a specific technical expertise, which the customer may not have in-house or may not want to acquire. Therefore, manufacturers may benefit from their suppliers know-how in multiple ways. First, suppliers continuously screen available supply sources for their customers and present them with alternative new solutions based on their in-depth knowledge of the supply market and its evolution. Denice: (This supplier) comes to our facility at least once a week and works very extensively with our design engineers. So if they have an application for a semiconductor, they give him the performance specifications and let him come back with one or two solutions. This reduces the investment we have to make in terms of knowledge and experience of individual components. The semi-conductor market is changing every single day, and to keep abreast of all new products in the market would be very expensive for us to do. So we rely very heavily on this supplier to bring us those products and give us awareness. It also means that we can have younger people on the engineering staff. They don t have the same background. Past experience with a customer s products and a thorough understanding of the manufacturer s operations create an opportunity for a supplier to add value in the improvement of existing products. Our interview with Shawn illustrates this point: Shawn: Suppliers that have a lot of experience with your products know how to make parts efficiently and effectively. A supplier that has done a specific part for years can turn around and make a change at a third of the cost of a new supplier. Their lead-time is usually less also because they can do the set-up in the dark. And they make suggestions. I had a supplier call me and say This part is exactly like that part, exactly the same fit, form and function, except that one has an additional process on it. Do you want to make an engineering change on it? The expertise in a relationship is amazing in terms of the value it creates. The experience and knowledge really protect them from global competition. I have looked at suppliers in Asia and Mexico, and can t find anyone who can make it for anything close to the price. Valued suppliers are involved early on in new product development. They are brought in as experts to suggest solutions and to take cost out of the product right up front. Jack: We try to get the supplier in here up front. They are the experts on stamping and forging. Our engineers know what they want as far as design is concerned. But if you can get the forgers or stampers here, have them sit down with the engineers, and get the design right the first time, look how much farther you are in the process of development. We call it early supplier involvement. The suppliers can take costs out of the product right up front because they know what their capabilities are, and they share that with our engineers. Several participants mention a strong trend towards shifting more and more product development tasks onto suppliers. Instead of communicating drawings and specifications to suppliers for execution, they now ask them to bring in complete design solutions and take on project management. This trend has opened up a whole set of new opportunities for suppliers to add value based on their design and testing expertise. Scott: Our suppliers have full-time engineers in our tech centers. They do the design, the drawings, the project management work for certain commodities. It s a blackbox design. They supply us with a whole solution. It s the same with testing. We certify the labs of our suppliers. So they can bring us solutions instead of ideas. We don t have to do the testing again to verify their results. So, you minimize the amount of duplicate testing that goes on. In summary, supplier know-how represents a fourth dimension of relationship value. Suppliers may hold a specific expertise, which is not available within the customer s organization. This dimension encompasses several aspects. First, the supplier s extant knowledge of the supply market provides an opportunity to present the customer with new sourcing alternatives. Second, a supplier adds value in assisting the manufacturer in the improvement of existing products both in terms of functionality and costs. Finally, a supplier may assist the customer in developing new products Relationship value Dimension #5: time-to-market Over the past decades, competitive advantage in manufacturing industries has shifted from low labor costs and economies of scale to flexible manufacturing (Stalk, 1988). Today, speed and time-to-market have become strategic guidelines in designing and managing supply chains (Stalk & Hout, 1990). Dell s direct business model illustrates best this trend toward shorter cycle times. The company carries inventories of only 11 days on average and delivers its PCs built-to-order within 5 6 days of lead-time (Magretta, 1998). Suppliers are treated as in-house partners. Inventory levels and replenishment needs are shared in real time. When new products are launched, suppliers station their engineers in Dell s plants to fix design flaws in real time. Our interviews confirm the growing importance of timeto-market. Participants voice an increasing pressure on manufacturers to develop products at a faster pace. New products represent a growing portion of a company s revenue base. The following passage from household appliances illustrates this trend: Scott: I think what has changed in the US appliance market in the last three years is that there are more new products coming, while changes and product differ-

10 686 W. Ulaga / Industrial Marketing Management 32 (2003) entiation are very minor. Being able to make changes quickly was always important, but it wasn t as important in the past. Now we introduce more new products than we ever have before. All of a sudden, those new products have a significant impact on your revenue base. Being able to do that quickly is a much bigger deal than before. It has always been a factor, but it is more important now. As a consequence, companies devote significant efforts to decrease cycle times. For example, several years ago, it took U.S. car manufacturers months from the start of the design of a new model to getting the first vehicle off the assembly line. Today, automobile companies have compressed cycle times to less than 18 months. Frank: We build vehicles from the start of design to first product off the line in as low as 18 months, where three years ago, it took us close to months to do that. We are really trying to get cars to market much faster. We are still not a leader in that area, but we try to make up as much time as possible. Manufacturers turn to their suppliers in different areas to reduce overall cycle times. Speed of executing design work for a customer is one area where supplier can add value: Frank: Our global suppliers can get much faster turnaround in completing or changing designs. They take in a requirement and send it to an off-shore facility where they have much more of the day to work with it. If we decide at 3:00 p.m. to do something, they can send it to a new facility, and by the time you come back the next morning you already get a result. Speed also refers to developing prototypes faster. By developing a prototype right to the customer s specifications the first time, a supplier may improve cycle time significantly. Richard: You have to have instrument suppliers that are quick at what they do. For example, last week, we delivered two models to an instrument supplier, and they turned around prototypes within four days. That is an extreme, but typically what we are looking for are leadtimes of four to six weeks. Two years ago it would have been twelve to sixteen weeks. In addition, suppliers take on more and more testing and validation tasks, and they perform these tasks faster than the manufacturer. There is no need for retesting once the manufacturer receives the product. Frank: Suppliers add value through testing and validation. We have all kinds of validation requirements for our parts whether it is bumper impact tests or sled tests for the interior airbags. Suppliers take over more and more of our validation, and they are able to do it a lot faster. That helps us to improve our cycle times. Some of our validation equipment is used 24 hours, 7 days a week. By going to supplier facilities, we speed up the validation process and get cost savings faster. This is not only for new parts but also for cost improvements. In summary, our study confirms that a supplier s ability to reduce time-to-market represents a source of value creation in buyer supplier relationships. Suppliers add value through accelerating design work, developing prototypes faster than competitors, and speeding up the product testing and validation process Relationship value Dimension #6: personal interaction Though business relationships are established between organizations, they are actually managed by individuals. In fact, people make a relationship work or fail (Wilson & Jantrania, 1995). Personal relationships are part of the relational exchange, and buyers consider personal relationships as one important aspect of purchasing (Dwyer, 1993; Dwyer, Schurr, & Oh, 1987; Dwyer & Tanner, 2002). The participants in our study differ in the way they view benefits accruing from personal interaction in a supplier relationship. On the one hand, certain purchasing managers hold the development of relationships at an individual level in high regard and devote resources to building a rapport with suppliers. Jeff s interview illustrates this stance: Jeff: Every year we bring suppliers to a football game. We focus on those suppliers who save us money, have good quality, and we just like overall. It develops the social relationship and gives us an opportunity to talk off-line about things that are not necessarily about work. It allows us to get to know these people better. I specifically hold the social relationship in high regard as one of the important factors. Do you really want to call somebody who is going to yell at you or who has oneword answers and never returns phone calls? I have such a good relationship with this supplier that we don t beat around the bush. I just tell them the way it is, they understand, and they fix it. That is really something good to have. It is valuable. The development of interpersonal ties leads to a number of benefits. Communication between both parties is enhanced. If problems occur, they are more easily addressed. Each partner s objectives in the relationship are better understood, which provide both parties with an opportunity to expand the relationship as a whole. Jeff: When I first came to [company], the person who I took the position over was not well liked by the supplier. They voiced their opinion as such. I changed the way we work with them. When dealing with these people I look at them as more than just a tool. I look at them as a person. To me it is very important. If you don t have that I don t think you can function well in the industry. I think it [the relationship] grew more after I came on board, because of the relationship that I developed with them. I think they opened up and understood what they need to do to move the relationship ahead. I m not so sure they saw us as a long-standing customer before. Our relationship changed that, and I see this supplier developing.

11 W. Ulaga / Industrial Marketing Management 32 (2003) When comparing the working relationship with two suppliers of electrical motors, Mary mentions that one company is much easier to work with than the other. This considerably slows down the information process. Mary: One company is much easier, much simpler, to do business with than the other just because they give us their names and addresses. The quality people know the quality managers, they can call them up and talk to them. All of those lines are very open. The other company, well, you have to do all of those things through the salesperson. It is much more difficult to get the answers, because now my quality person is calling me asking a detailed question. And now I have to call the salesperson and give him a detailed question. And he goes and talks to his people who ask a question that neither one of us know an answer to. This is very important to those of us who have to deal with a supplier on a day-to-day basis. Personal interactions should be developed at all levels of the organizations, from the sales representative to the supplier s president. Richard: One of the things that are of value is that you have the presidents of these companies show their face here. We like the comfort of having the president here and knowing what is going on. I think that shows that you can call them. I can call the president of a company and get him to shake the stick over there. It s the name, the face: You can count on me if you need to use the silver bullet to get something done. I think that is very important. It s a comfort level. The absence of good personal interaction may endanger the overall relationship. Not having a good working relationship is considered counterproductive: Denice: I think the personal issues are important, at least for our company, because there is such a close interaction between their folks and ours. If you have people that for one reason or another do not get along, it strains the relationship and is counterproductive. So, I believe that the value of the interpersonal skills is quite high. Jack describes a situation of conflict in a supplier relationship. The supplier s salesperson avoids contacting purchasing wherever possible, and often directly interacts with the customer s engineers to get them to specify the supplier s product on blueprints. As a consequence, purchasing continuously searches for alternatives to replace the supplier. Jack: This supplier has a good quality product, but when you look at the purchasing side, delivery and their pricing,...[shakes his head]. When the salesman comes in here I don t want to spend time with him, because he just gives me a song and dance, and I usually end up getting into an argument with him. So when he comes in, he doesn t see me, he just goes up to engineering and gets his part on the blueprint, so that we have to buy it. Engineering says Well, [the supplier] gave us some nuts, and we qualified the program on it. You have to go to them. If they know that they are the only one on there, then we get screwed in the long run because their prices are going to be out of this world. I try to build a better relationship. It hasn t been good for me because I have been burnt too many times with those guys, and they don t seem to be changing their ways. A second set of participants expresses an opposite view of how social interactions influence a manufacturer supplier relationship. These purchasing managers refer to the manufacturers internal policies and rules of conduct with respect to handling gratuities. Richard: As a buyer, you really have to be careful of how you are perceived within the department and the organization. If you are walking out of the front door every day to the supplier s car to get lunch that is an issue. We don t mind the occasional. But for the most part we have a very low tolerance level for it. The individuals that work for us and for the suppliers are well-paid individuals. We don t need to take advantage of the other stuff. Beyond ethical considerations in how to handle personal interactions in a manufacturer supplier relationship, some participants suggest that their organizations have implemented procedures limiting the role played by interpersonal relationships. Frank: From my experience, it doesn t make a whole lot of difference who is on the other side. I think [our Vice- President of Purchasing] doesn t want decisions to be made because of how you feel about certain individuals or suppliers. When he came on board 9 or 10 years ago, his big thing was to bring the sourcing decisions to a central table where everyone has a chance to see what is going on. That took away a lot of power from buyers who were in their own region or division making their sourcing decisions based on who they knew. The central sourcing took a lot of that social element out of the equation. All of a sudden, we started comparing notes on the suppliers, and that started the development of global quality data that we have on suppliers. (...) This is also the reason why we support electronic bidding. In the process, we will send out quotes, and the bids come back in. Typically, we will do a technical review with the supplier, and we will have our quality engineer there to make sure they fully understand all the performance requirements of the quote. Once we feel that the supplier s proposal is good from a technical standpoint, we start bidding with them. In some cases, there is some leeway for the buyers to push a sourcing decision into one direction if they have a good relationship with a supplier and know the supplier will do a good job. But from our standpoint, we are not getting the best result if we are steering.

12 688 W. Ulaga / Industrial Marketing Management 32 (2003) In summary, the responses from the participants reflect a strong diversity of opinions held about the potential of value creation through personal interaction. For those participants who view personal relationships as a value driver, we can identify improved communication, more effective and efficient problem resolution, and a better understanding of each partner s goals in the relationship as most important benefits. These benefits contribute to growing the relationship as a whole Relationship value Dimension #7: price In their research on customer firm costs in buyer supplier relationships, Cannon and Homburg (2001) mention direct product costs, that is, the actual price charged by the supplier for the main product sold, as the sacrifice most easily identified by purchasing managers. The participants in our study confirm the role of direct product costs as an important aspect in evaluating relationship costs. Respondents state different reference points when judging price levels. Three purchasing managers expect their suppliers to align themselves with the lowest possible price in the market. Four participants benchmark suppliers against competition, to obtain a fair market price or an average market price. Finally, two participants expect their suppliers to charge a reasonable price. Lowest price Frank: We found in electronic bidding that suppliers will keep going until they are totally exhausted. If a supplier submits any new quote within the last 3 minutes of an auction, there is an additional 3 minutes added to it. So as long as somebody continues to submit a bid, the auction will keep going. If in the last three minutes nobody is bidding at all, then you know you have gotten to the bottom. Market price Denice: We make certain that we have market pricing, that is, what we pay is reasonable in terms of what the market can bring to us. If our supplier is not best-in-class in terms of pricing, we negotiate with them to get closer to the market price. Reasonable price Jerry: We don t want any supplier that loses money but we want them to be tough too. We want them to give us the best cost as they can at the margin they can live with. They need to make money as well as we do. When asked, only two of the nine participating companies agreed that they accept a supplier s higher price in exchange for additional benefits received in a valued relationship. At first, this low number may appear counterintuitive. The customer value literature suggests that a customer should be willing to pay a higher price for a higher-quality product (Zeithaml, 1988). Similarly, it could be argued that a supplier s investment in a close collaborative business relationship should provide the supplier with an opportunity to ask for higher prices than competition. Only one of our interviews illustrates such a perspective: Richard: If you look at the overall price for the kit [orthopedic implant and surgical instruments], the instruments are not the key cost factor. For a new product, we need to meet the market launch and rely on the supplier to deliver the product. Over time, as volumes go down, it wouldn t be economical to stay with more expensive suppliers. There are smaller companies that will take on those instruments for a cheaper price. When you look at moving very complex instruments from one supplier to another for the sake of saving a few dollars, there really have to be significant savings to outweigh the potential pitfalls of a product not meeting specifications or failing in the field. When further probing into how managers view direct product costs, we found that the majority of participating companies faces a strong pressure to reduce costs. Jack: We have tremendous pressure to drive down costs, and we are just getting hammered year after year for price reductions. Our goal is to get 4 6% productivity every year out of the contract. We have been driving prices down year over year with these suppliers. The train is coming to a slow down. You can t get a whole lot more productivity out of them. It hurts me because I have a deep relationship with these suppliers. Many have helped us run programs over many years, and now suppliers say This is it. We have to give you a price increase. Raw materials are going up because of the embargo that is going on with imported steel. So once they do that, I have to say Ok, what can we do down in Mexico? In response to continuous price pressures, suppliers are expected to commit to annual price reductions within longterm contracts. They need to continuously identify new ways to decrease costs and to pass savings on to the customers. The following passages from Scott s interview illustrates this customer expectation: Scott: The prices for appliances continuously go down. It is a very cost sensitive, aggressive business. Our best partners understand that. They don t fight it. Their business is designed around it, working with us to take cost out of their business and our business. So they are very aggressive when it comes to doing cost reduction projects. And that is an absolute requirement to be a good supplier with our company. The manufacturers typically ask for price concessions between 4% and 8% annually. In turn, they are prepared to increase purchasing volumes with suppliers. Denice: We pull similar components together and then submit that entire package out to 4 or 5 suppliers. It gives them the opportunity to not just look at an individual part but at a piece of our overall spend, and that increases the amount of business they can have with us. This in turn

13 W. Ulaga / Industrial Marketing Management 32 (2003) reduces the cost for us. I guess it to be about an 8% reduction a year. And we have done that now three years in a row. Overall, in the three years, we have reduced material costs by about 25%. A collaborative relationship may protect a supplier from competition. If the company is at a price disadvantage, the manufacturer may work with the supplier to reach a price that is considered to be competitive. Scott: When you talk about costs in a relationship, there are things that you probably do with a partner that you may not do with a non-strategic supplier. If your supplier is at a competitive price disadvantage for a motor, you may give him time to recover, time to get to a competitive price as part of your partnership. Instead of forcing them to make a change today, you work with them to get there over time. With a non-strategic supplier you may kick them out of the supply base and bring on a new supplier. There is an opportunity cost associated with the relationship. Finally, switching costs represent an important factor when evaluating a supplier s direct product costs. The following passages from our interview in the aircraft industry illustrate the importance of barriers to entry: Shawn: You can t change to another supplier because of the tooling. We invest up front, and it is up to them to maintain those dyes and re-sink them. They pay for that. That s why they say You have exclusive use of the dyes, but you can t pull the dyes out and take them to somebody else. (...) Then, there is another barrier. You can have tooling made somewhere else, and it would cost about 50,000 dollars. But the biggest barrier is that it would cost us well over a million dollars for a requalification of a new supplier. Once you are in, you are in for life unless you screw up big time. If you want to change forgings suppliers you have to go back and get our customer s approval. The customer would say Well, ok, but you need to run me qualification tests. So it is a big cost associated with making a change like that. Certain suppliers take advantage of such a situation. They are aware that customers would endure significant switching costs if they wanted to change to another supplier. These companies also take advantage of emergency deliveries to ask for considerable price premiums. As a response, the company continuously searches for alternatives. Jack: We have suppliers that we ask to work on a weekend, and they won t come in with any premium. They will say You guys are good customers, we will support you. It is a unique situation. But guys like [supplier] will take advantage of it: Oh, you want us to work this weekend? That is another $10,000 (...) We try to get another supplier on board to take this supplier s place. It will take a while to do it because we need a lot of testing. But we know there are other suppliers that can be very competitive with [supplier] pricing. That will force them to come back to the negotiating table. We need to keep the pressure on them. If they know that they are the only game in town, we will get a price increase every year. In summary, our interviews confirm that manufacturers focus above all on direct product costs. A supplier s products may be priced below, above, or at competition. Some participants expect a reasonable price or a market average. All manufacturers expect their suppliers to commit to annual price decreases. They assist suppliers in driving down prices through joint cost reduction programs. However, switching costs may significantly slow down the manufacturer s ability to gain price savings over time Relationship value Dimension #8: process costs Researchers have argued that firms collaborate in relationships to achieve improvements in overall operations, not just in price reductions. For example, Cannon and Homburg (2001) mention acquisition costs, that is, costs customers incur in acquiring and storing products, and operations costs, that is, costs inherent in the customer firm s primary business. Our participants mention several directions of value creation through cost reductions. In the category of acquisition costs, they discuss transportation costs, inventory management costs, order-handling costs, and costs related to incoming inspections. Transportation costs. One company mentions transportation costs as a differentiator among suppliers. However, most respondents request that suppliers take on logistics costs and quote prices Free on Board (FOB), with little leeway for differentiation. Inventory management represents an second opportunity for cost reductions. Financial benefits accruing from having the supplier manage the customer s inventories are reduced inventories, less working capital needed by the manufacturer, and improved cash flow. One company mentions its stocking relationship with a supplier: Denice: They rent space in our facilities and bring the stock of the products into that area. Rather than shipping to us, they deliver the product to our production floor upon demand. There are obviously some very big financial advantages to having a stocking relationship. We have reduced our inventory, which increases our working capital. And in terms of cash flow that s a big advantage. Order-handling further contributes to reducing relationship costs. Customers need to allocate less time and dedicate fewer personnel to the ordering process. One company mentions that it heavily relies on the supplier for orderhandling given the limited number of buyers in the purchasing department: Jerry: Our organization is very flat. We can t spend a lot of time doing the buying from this supplier and

14 690 W. Ulaga / Industrial Marketing Management 32 (2003) everything else too that goes along with it. This supplier has been servicing us for about 30 years. He comes in here once a week, takes an inventory of his products and then drops the order off to the buyer. The buyer reviews it to make sure it is in the levels that we established and places the order. The supplier handles the orders for us, within the parameters that we have set for him. He saves us tons of time. It s a great asset because my buyer doesn t have to spend that time reviewing reports or going out on the floor to see what s what. Saves us a lot of time. Several manufacturers have implemented automatic replenishment programs or KANBAN systems to standardize order processes. Incoming inspections. A fourth vector of reduced acquisition costs are incoming inspections. Several manufacturers indicate that they have abandoned incoming inspections as their suppliers fulfil high quality standard for incoming products: John: We track quality each month through our No- Incoming-Verification (NIV) program. If a supplier s product meets our quality criteria so many months, we don t inspect the product anymore here. As soon as it comes in the door it goes to the assembly line. Operation costs. The participants in the present study mentioned only few operation costs where suppliers actually add value through cost reductions. Among those cited by at least one manufacturer were downtime costs, costs for tooling, warranty costs, and costs related to differences in product yields in the transformation process. Regarding the overall distinction of the three cost categories, all but one manufacturer find it difficult to separate direct product costs, acquisition costs, and operation costs. The following passage illustrates the difficulties purchasers have in making such a distinction. John: We don t have anything that says the direct cost is this, the acquisition cost is this, or the operations cost is that. We don t have a monitoring system to cover that. Determining the direct cost is simple. I know each unit price of the circuit board. We compare this supplier s unit cost to someone else when we first design a new program. Thereafter, we monitor a supplier s quality and delivery performance. If we have zero PPM quality problems and a 100% on-time delivery, then our cost of using that product is minimum. We know that the cost is higher for suppliers that have continuous problems with those measurements. So if it gets to the point where we spend more time than it is worth, we will re-source that product with another company. We are aware of and minimize those additional costs with a number of different tools, but I can t sit here and distinguish them. The difficulties managers find in differentiating these cost elements refer to the absence of adequate information systems relating costs to specific parts purchased. As an illustration, one company mentions that its accounting department tried to implement such a tracking system for several years. However, the project was finally abandoned, as it was considered too complex. Mary: We focus on purchasing prices for parts. They re all quoted delivered to our factory so the whole logistics costs are easy to consider in the price. We don t have a good way of then saying It costs us this much more to inspect it, this much more for order handling. We don t have any cost matrix. We aren t tracking it. We have played around, trying to use our supplier rating program to capture some of that. Basically we wanted to say If they have very poor quality here, then there is a cost to us there. But how do we take that supplier rating, which we know is poor, and put a dollar value on it and then add it to the cost of product? It s too complicated. In summary, suppliers find multiple ways of adding value by taking costs out of a business relationship. Major areas for reductions in acquisition cost are inventory costs, orderhandling costs, and costs for incoming inspections. Among operation costs are downtime costs, costs for tooling, warranty costs, and costs related to differences in product yields in the transformation process. Overall, the companies find it difficult to clearly distinguish between direct product costs, acquisition costs, and operation costs due to the lack of adequate measurement systems. 5. Implications The present study has a number of implications for managers and researchers alike. From a customer perspective, our findings allow manufacturers to assess how a supplier adds value in a relationship. Drawing on previous approaches of profiling customer value perceptions of physical products (Woodruff & Gardial, 1996), Fig. 2 illustrates how a manager could profile an existing supplier relationship and benchmark it against an alternative supplier. In this fictive example, Suppliers A and B are compared against each other. Alternatively, a specific supplier profile may be compared with an expected or ideal profile. The suppliers are first evaluated on each value-creating dimension. If needed, each dimension may be further broken down into its specific subcategories (as described in Fig. 1) using scores within a range of 1 (very weak) to 7 (very strong). Then, the supplier s scores on each dimension are computed and plotted on the diagram in Fig. 2. The figure shows that Supplier A scores high on quality, service support, and delivery. In addition, the company offers a low purchasing price, that is, Supplier A scores high on this dimension from the customer s perspective. In turn, the company does not perform well on time-to-market, supplier know-how, and personal interaction. In addition, the purchasing manager perceives that

15 W. Ulaga / Industrial Marketing Management 32 (2003) Fig. 2. Relationship value profiles. the company does not really add value by continually driving down other costs in the relationship (low score on process costs). Supplier B has a very different profile. The company scores well on the value-adding dimensions of product quality, service support, delivery, time-to-market, supplier know-how, and personal interaction. This supplier scores low on price, that is, the company asks for a higher price than competition. This is partly offset by the company s ability to assist customers in improving process costs through inventory management and order-handling (high score on process costs). As a consequence, the purchasing manager may conclude that both suppliers have very different, yet complementary, value-creating capabilities. Supplier B may have an ideal profile for developing a new product, that is, sourcing an electrical motor for a new household appliance. In turn, when it comes to sourcing a motor for an existing mature product, Supplier A might be better adapted. To take the assessment a step further, one may attribute weights to the dimensions in Fig. 2. By attributing a relative importance to each value driver, an overall value score may be calculated for any given supplier relationship. In our example, the multiplication of relative weights and scores obtained on each value dimension results in an overall score of 4.2 for Supplier A and 5.25 for Supplier B. On this basis, Supplier B would be considered as delivering more value than Supplier A. Our findings also offer insights for vendors. In many markets, suppliers face increased competition, both domestically and from abroad. Consequently, managers ask for ways to avoid a strong trend towards commoditization in their markets. The assessment described in Fig. 2 can help suppliers position themselves on the diagram and compare how they perform against competition. The tool allows suppliers to search for improvements where they perform lower than competition, or stress strengths relative to other suppliers. Overall, it helps suppliers to move away from competition solely based on price and differentiate themselves on other value drivers. In such an exercise, it should be underlined that qualitative aspects are more important than quantitative measures. For instance, in our example described in Fig. 2, Supplier A might want to explore why the company is perceived to perform lower than Supplier A on supplier know-how, and what specific actions it would need to take to move the company to a level comparable with Supplier B. In turn, Supplier B may want to investigate what value drivers allow the company to perform better than other suppliers on process costs. A thorough understanding of these competitive advantages may help the company to take the relationship even further and protect itself from competition. Finally, our study s findings provide valuable insights for modeling relationship value. To capture the various facets of the construct, empirical research should rely on multidimensional scales of relationship value in business markets rather than overall measures of the construct. Diamantopoulos and Winklhofer (2001) argue that reflective specifications of latent variables often mistakenly prevail in the marketing literature. In reflective specifications, higher-order constructs are assumed to cause their dimensions rather than being caused by them. Consequently, dimensions are viewed as strongly correlated and interchangeable facets of the focal construct (Bollen & Lennox, 1991). In turn, formative specifications view a higher-order construct as being caused by its dimensions. From a formative perspective, the higher-order construct is defined by its dimensions, which need not be highly correlated with each other. The choice between a formative and a reflective specification should primarily be based on theoretical considerations (Diamantopoulos & Winklhofer, 2001). In our context, previous research on relationship value does not provide any guidance as to how the different dimensions should be consolidated. Researchers have conceptualized relationship value as a reflective construct without justifying their approach (Lapierre, 2000). However, the findings of our grounded theory study suggest a formative measurement approach. Indeed, the value dimensions need not be highly correlated with each other. For example, a specific buyer seller relationship may well score high on product quality (Dimension 1) but low on personal interaction (Dimension 6). Such situations are described repeatedly by participants in our study. Consequently, from a methodological standpoint, a formative measurement approach should be used, rather than reflective measures when modeling relationship value.

16 692 W. Ulaga / Industrial Marketing Management 32 (2003) Limitations As in any empirical research, the results of the present study cannot be interpreted without taking into account its limitations. First, the sample of purchasing professionals selected for the purpose of this study is not representative of the population of manufacturing companies. Only quantitative approaches using large sample sizes could provide generalizations across manufacturing industries. Second, our research focused on manufacturer supplier relationships. Dimensions pertaining to services industries were not addressed in the present research. It is expected that the particularities of service industries warrant the development of a different set of value-creating dimensions. Third, relationship benefits and sacrifices were only studied within the manufacturer supplier dyad. Value drivers within the larger network of relationships were not addressed. Finally, we adopted a static view of relationship value capturing a snapshot of customers perceptions of relationships with their suppliers at a given point of time. Researchers have suggested ways of measuring benefits and sacrifices over the lifetime of a business relationship and calculating its net present value (Hogan 2001). However, to the best of our knowledge, no empirical research has yet operationalized this issue. 7. Directions for further research The present research provides opportunities for further research in understanding value creation in buyer supplier relationships. First, it would be interesting to develop multidimensional measurement scales based on the relationship value dimensions identified in this study. Empirical research based on a cross-sectional sample of manufacturing industries could provide the possibility to test, validate, and refine the scales. Second, it would be interesting to integrate relationship value in prevailing models of relationship marketing (Morgan & Hunt, 1994). This would allow researchers to understand how the construct affects the way we model business relationships. For example, it would be interesting to understand how value relates to other key relationship variables such as commitment, trust, satisfaction, and loyalty. Finally, the development of managerial tools based on the approach presented in our study would provide managers with a simple, yet effective, tool for assessing the value created in buyer seller relationships. The understanding of how supplier relationships create value and competitive advantages for customers is of increasing importance in many business markets. Yet, few researchers have investigated the construct in business-tobusiness relationships and suggested psychometrically sound measures of the concept. 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