Wang ping

MANAGING SUPPLIERS BEYOND TIER 1: AN EXPLORATION OF MOTIVATIONS AND STRATEGIES LEADING TO A NORMATIVE MODEL DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Ping Wang, M Eng ***** The Ohio State University 2007 Dissertation Committee: Approved by Professor Douglas M Lambert, Advisor Professor Keely L Croxton Professor A Michael Knemeyer Advisor Graduate Program in Business Administration Copyright by Ping Wang 2007 ABSTRACT The purpose of this research was to determine how the decision to manage suppliers beyond Tier was made in a supply chain context This research explored the reasons for managing suppliers beyond Tier 1, when to manage them, how to manage them, how the decision to manage them was made, and how to measure performance Traditional supplier relationship management focuses on managing the firm’s direct suppliers, that is, Tier suppliers However, many cost and quality problems can be traced back to suppliers beyond Tier In some cases, a company will occupy a more advantageous position by developing relationships with indirect suppliers In fact, forward thinking executives have begun to manage suppliers beyond Tier in order to discover opportunities to improve their competitiveness Managing suppliers beyond Tier will provide management with greater knowledge and more opportunities of possible benefit for the entire supply chain, since the cost and quality of raw materials have significant impacts on the final products Proactively managing the supply base beyond Tier will assist management in succeeding in the competitive business world This research was intended to identify the potential opportunities for managing suppliers beyond Tier directly The literature in interorganizational relationship management and related areas was reviewed to assess the critical aspects that needed to be considered in managing ii interorganizational relationships Four aspects were found to be critical: the formation and development of an interorganizational relationship; the purchasing context; the governance mechanism (or the governance structure); and the evaluation of performance improvements that result from the interorganizational relationship The purchasing context represents the basic conditions of purchasing including the importance of purchasing to the company, the product characteristics, and the supply chain network structure The importance of purchasing to the company reflects the motivations for building a close relationship with a supplier The governance mechanism, which is about how to manage an interorganizational relationship, emerged as one of the most critical aspects, since it was the primary purpose of this research to explore why and how to manage suppliers beyond Tier In order to develop a normative model that management could use as a reference, the motivations, strategies, and their associations in managing suppliers beyond Tier were explored It was also a purpose of this research to develop a framework of the decision-making process for managing suppliers beyond Tier The case study approach was chosen since it was the most appropriate research methodology to investigate the types of “why” and “how” questions this research raised In addition, it is only during a case study interview that an investigator can probe unseen constructs (categories) and explore their logical associations Furthermore, a case study approach guarantees the information richness by providing the interaction mechanism between an investigator and the informant iii A total of seven companies were included in the research and 10 interviews were conducted In order to “maximize the variance,” these companies were carefully selected in consideration of their industries and their products All seven are multi-billion dollar companies, with the unit price of finished products ranging from a few dollars to tens of thousand of dollars They represented consumer packaged goods, durable goods, quick service restaurant chains, and retail industries Data were collected from 15 supply chains of either raw materials or supply parts for finished goods, in which management had developed relationships with suppliers beyond Tier These supply chains were either manufacturing dominated supply chains or retail dominated supply chains Data were collected from personal interviews An interview guide with 18 interview questions was prepared to facilitate the interview process and to structure the data collection process The questions served to collect data around four key research questions: “Why you manage suppliers beyond Tier directly?”; “How are the decisions to manage suppliers beyond Tier made?”; “How is a supplier beyond Tier managed?”; and “How is the management of a relationship with a supplier beyond Tier evaluated?” Interviews were taped and transcripts were prepared for coding and analysis A case report was compiled and sent back to the interviewees for verification Data showed clear patterns in the motivations and strategies for managing suppliers beyond Tier There also existed patterns in the associations between the motivations and the strategies A normative model was developed on the basis of iv these patterns Managers can use the normative model to identify the strategies for managing suppliers beyond Tier 1, and refer to the model with specific motivations and/or activities to establish their action plan Based on the data collected, a framework of decision-making process was also developed, which can be used together with the normative model developed in this research for managing suppliers beyond Tier The most significant conclusion that could be drawn from this research was that the management of suppliers beyond Tier was a reality Indeed, practices in managing suppliers beyond Tier were generalizable In fact, the normative model was developed on the basis of generalized motivations and strategies Another significant conclusion was that the decision-making process for managing suppliers beyond Tier was generalizable A five-step decision-making process was derived from the case study data and it should be replicable in a new environment when needed The research has a number of implications for both practitioners and academicians Based on the findings, many decisions in managing suppliers beyond Tier could be improved if a normative model showing the associations between motivations and strategies was available to managers Also, a framework of the decision-making process would be of significant assistance in managing suppliers beyond Tier In addition, improved understanding of the complexity of a trilateral interorganizational relationship could help management recognize quick-wins in the task of managing suppliers beyond Tier v The academic contribution of the research relies on its triadic perspective Conventional interorganizational relationship studies focused primarily on the motivations and strategies for managing a dyadic and direct interorganizational relationship, while this research focused more on a triadic relationship of companies from three different tiers in a supply chain Findings from this research revealed that the type of product characteristics and the type of supply chain structures had an impact on how to manage a close relationship with a supplier beyond Tier vi Dedicated to my mother, Yonghui Tian 谨献给母亲, 田永慧大人 vii ACKNOWLEDGEMENTS It is a luxury to have so many wonderful people to thank for their contribution to the success of this endeavor It would not have been possible to complete this dissertation without the encouragement and support of these individuals I am deeply indebted to the executives of the companies that participated in this research They shared my enthusiasm for this topic, devoted their time, provided necessary data, and gave their insights to this research Their invaluable experience related to this research topic not only revealed their way of analyzing and solving problems, but also built the foundation for the deliverables of this research I also want to thank the members of The Global Supply Chain Forum at the Fisher College of Business, who attended my presentations at several meetings during the progress of this research They provided insightful comments and feedback to help me continue moving forward towards the success of this research I would like to gratefully and sincerely express my gratitude to Professor Douglas M Lambert, Director of the Global Supply Chain Forum and Chairman of my dissertation committee His patience, guidance, understanding, and encouragement, were essential to this research As a mentor, role model, and critic, in the best sense, Professor Lambert not only displayed the highest standards of professional competence and conduct, but also demonstrated his scholarly demeanor viii and sincere concern and respect for the needs of his students His uncompromised vision in business research and insurmountable enthusiasm in exploring the unknown will continue to benefit me throughout the rest of my life It was my privilege to be his student, and his mentorship was paramount in providing a well-rounded experience consistent with my long-term career goals I would also like to express my sincere appreciation to Professors Keely L Croxton and A Michael Knemeyer, the remaining two members of my dissertation committee I have been blessed with their remarkable insight and care from the beginning of this research I am much indebted for their intelligent and inspiring advice throughout the course of this research The precious time they devoted to providing guidance regarding the data collection, reading this manuscript and giving their critical comments is highly appreciated Their support was invaluable to the success of this dissertation I would like to thank Professors Martha C Cooper, Walter Zinn, and Thomas J Goldsby Together with the three professors on my dissertation committee, they provided me with multiple and rich environments for learning a tremendous amount of knowledge inside the classroom, in conducting research, and through informal conversations in casual situations The close interaction with these remarkable professors was one of the best features of my logistics doctoral experience I want to thank Dr Sebastián J García-Dastugue, a past doctoral student of the logistics program, who provided many invaluable suggestions in facilitating my journey to this dissertation, both before and after his graduation I also want to thank ix operate at the level of management’s expectation In addition, management had to understand what was an acceptable margin If the margin was good for the converters, management of the converters would hand over the purchasing responsibility for the resin to the beverage company Besides, management of the beverage company also assumed some of the converters’ risks For example, whenever the resin price was up, it was the beverage company who would find ways to deal with that, not the converters Another issue was how to protect the confidentiality of the price The real price was only known by very few people in the industry Once management of the beverage company received credit for preventing price information from leaking, they could obtain confidential information and retain it in their process It was also a bit challenging for the resin companies to sell resin to the beverage company rather than selling to the converters, because resin companies were receiving significant pressure from the converter base In order to obtain the best price from the resin suppliers, management of the beverage company assured the suppliers that they would receive constant volumes, which were big enough to make the beverage company important to the suppliers To overcome the reluctance from the converter base, management guaranteed them an acceptable margin In short, converters gave up their purchasing responsibility for the acceptable margin and a stable business, while the focal firm undertook more responsibilities and risks for gaining lower bottle prices The shared risks/rewards program was effective in this case The issue of price volatility was also solved by understanding the cost and obtaining the right product at the right price After recognizing that the bottle price volatility was highly correlated to the resin price volatility, management tried to negotiate resin prices with resin suppliers for longer terms to stabilize the resin price 260 To avoid passing the cost advantage to its competition, management of the beverage company limited the converter’s resin price to only their volume They also utilized “price masking” techniques to prevent the real price information from leaking When a resin supplier could not make a deal at the price management desired, they would tell the supplier to come back in the next quarter By doing so, management kept certain levels of price competition among resin suppliers While the container cost (bottle cost) was still the major driver for the company to manage beyond Tier 1, there were other opportunities for reducing costs at the second tier that management was investigating For example, the energy cost was very high at the converter tier, so it was the next area to be explored Converters were interested in issues such as how they could make the machines work faster and how they could potentially save energy These issues were also important to the beverage company, thus management of the beverage company would eventually work with converters on these issues In addition to realizing cost benefits by managing converters directly, management also recognized opportunities to partner with converters in new product development Packaging innovation is regarded as one of the most important competitive weapons for a beverage company’s success Converters invested large sums of money in their conversion processes in order to produce innovative packaging materials By partnering with converters in new product designs, management of the beverage company could benefit from the converters’ “innovation dollars.” Management believed that the upstream portion of its supply chain was more important than the downstream For example, they thought the converter base was 261 more important to the company’s business than the bottler base Management now decided to go beyond the converter base to manage resin suppliers directly The motivations were to simultaneously leverage volume and receive better rates on packaging materials and transportation It was impossible to everything at the same time, so management had to recognize which innovation was the priority Again, they had a business structure and a business plan to accomplish this They also recognized the fact that it was a multi-year strategy and they needed to manage back in the value chain piece by piece At the fourth tier of the supply were producers of crude oil Because the resin business only accounts for 6-7% of the business of the oil companies, their interest levels in what the beverage company could bring to them was marginal Organizing the supply base and ensuring that it was the right supply base led management to the next question, that is, how to jointly manage the price volatility? 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