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: wulaga@nd.edu, wulaga@escp-eap.net (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.