Managing Supply Chain Relationships
Lately, industry majors such as Nissan and IBM have embarked on ambitious efforts to craft high-performance supply chain relationships. However, as noted by Nissan’s CEO, Carlos Ghosn, such attempts often fall short of expectations because of incompatibilities between the ways in which different supply chain constituents are managed.
Today’s “extended” supply chains are complex. Typically, they comprise both relationships with external suppliers and individual departments (e.g. marketing and production) within a firm itself. The performance of a supply chain depends on how individual relationships are managed and the overall pattern of relationships management.
Alok Kumar, assistant professor of marketing at the Smeal College of Business, and coauthors Jan Heide of the University of Wisconsin-Madison and Kenneth Wathne of the Norwegian School of Management, study two broad ways to manage internal and external relationships—hard incentives and soft relational norms.
Hard incentives, like price premiums, are one means to motivate performance. Using incentives requires that each party’s role be distinctly and explicitly specified.
A second way to motivate performance involves fostering a sense of unity and team spirit through ongoing socialization. Where such efforts succeed in cultivating norms, a supplier is likely to view the focal firm’s goals as its own and is motivated to deliver superior performance. Similarly, norms can exist in an interdepartmental setting. Norms-based relationships differ fundamentally from incentive-based ones because in the former, individual roles and tasks often remain overlapping (i.e., parties share joint roles, as one ’team’) and tacit (i.e., not documented explicitly or contractually).
“It is precisely in their ill-defined form that norms become valuable to firms,” says Kumar. “They create a zone of indifference—a craft to forego personal gains, within limits, for the well-being of the relationship—which helps firms adapt quickly to marketplace changes.”
Existing research demonstrates how both incentives and norms can motivate performance when deployed individually within a relationship. However, what happens when different mechanisms are deployed across related supply chain relationships—toward an external supplier and between a firm’s internal departments—is less well understood.
The authors argue that coordination problems can emerge when different mechanisms—incentives and norms—are deployed in the same supply chain. For instance, when Nissan deployed high-powered incentives with suppliers, they were motivated to cooperate. However, these efforts ran into a roadblock—the internal culture of norms. The lack of role specification and documentation internally creates problems for suppliers, who demand an explicit specification of tasks that impact their incentives.
Companies need to be cognizant of potential incompatibilities across relationships, which can create problems if not managed properly. “The two types of relationship management strategies have to work together holistically across external and internal relationships in order to deliver performance to the downstream customer,” says Kumar. “Misalignment of individual components can precipitate system-level performance losses.”
Such was the case with Nissan. By themselves, hard supplier incentives have a beneficial effect on performance, as do the system of soft relational norms internally within the firm. However, the combined effect of these mechanisms results in coordination slippages for the system as a whole.
The researchers suggest that firms start with a relationship blueprint that comprises all of the different parties or units that are involved in servicing the customer. This may reveal potentially problematic mismatches across units due to differences in governance mechanisms. If the expected efficiency losses due to mismatches are substantial, firms should consider altering the magnitude of incentives or norms. While altering incentive systems might sacrifice certain gains within an individual relationship, doing so could limit overall performance losses for the supply chain as a whole.
However, caution is needed. Deep rooted norms and incentives may both be subject to considerable inertia and attempts to alter them can mobilize opposition from various stakeholders. Ample and transparent communication is a necessary requisite to manage such change processes.
Firms that have developed strong internal norms can limit the risk of mismatches and performance losses by diligently qualifying suppliers based on their willingness to subscribe to the norms. Toyota, for instance, practices such a philosophy.
Especially creative organizational solutions may be called for when a firm has multiple suppliers who are managed very differently. For instance, the organization may need to be decomposed into distinct internal teams which deal with particular suppliers, such that both external and internal systems are subject to compatible governance regimes.
Overall, the key insight is that firms need to consider the supply chain system as a whole. Various relationships may work well individually, but as a system, they may not. Specifically, mixing different relationship strategies can create coordination problems and performance losses.
Their paper, “Performance Implications of Mismatched Governance Regimes Across External and Internal Relationships,” has recently appeared in the Journal of Marketing.