C USTOMER – SUPPLIER RELATIONSHIP AS A DETERMINANT OF PROGRESS

This chapter is based on the article V, which concentrates on analyzing customer–

supplier relationships and their management in the light of inter–organizational development of cost management. In this sense, a detailed case study of three of the cost management development projects and customer–supplier relationships in network A was carried out (1^st, 2^nd, and 3^rd A–suppliers). The results of the projects were presented also in the previous chapter.

Comparing the cases with cost management literature, the multilateral openness attained in case 3 is uncommon. Most of the cases reported relate to dyadic practices (Cooper & Slagmulder, 1999b; Mouritsen et al., 2001). The one–way openness in cases 1 and 3 illustrates the problem of imbalance of power: Cost information shared only one–way may whittle away confidence at the supplier’s and lead to conditional openness. Conditional openness may not be the most suitable approach in strategic partnerships. OBA was achieved in two out of three customer–supplier relationships studied. The effect of the main contractor’s attitude and power was significant, because the main contractor did not show any openness regarding its own cost information. These cases lengthen the list of the many one–way open–book practices (Seal et al., 1999; Mouritsen et al., 2001), which reinforces the argument of Stuart et al. (1998, p. 84) according to which

”… the tiered supplier partnership model clearly focuses on benefiting the buyer.”

This study brings in evidence of benefit also for the suppliers in the spirit of Ellram’s (1995) functionality statement. In the cases 1 and 3 there was a win-win situation.

Case 1 emphasizes the importance of inter–organizational process assessment and win-win solutions in the strategic relationship category. On the other hand, the strategic supplier 2 was not involved in any open–book procedure due to the main contractor’s weak power over this supplier. Another explanation could be that the main contractor could not create a sufficiently attractive win–win solution for the

supplier 2 to participate. In case 3, the nature of process assessment was mainly benchmarking on the main contractor’s side. The win–win solution was based only on increasing volume, compared with the product mix profitability analysis in case 1.

Case 2 seems to be a normal cost–efficiency improvement project using ABC; inter–

organizationality does not substantially appear in cost information use. Many of the experienced development results could have been reached in normal intra–firm cost accounting development projects without the inter–organizational approach.

The analysis of customer–supplier relationships revealed features that explain to a large extent the reasons for the results of cost management development projects. In case 1, the supplier’s cost information became open and modern cost accounting techniques were used. The most important driver for the results was the supplier’s continuous improvement capability and the parties’ commitment to long–term cooperation. In case 2, the supplier hid its improved cost information from the main contractor. Recent history revealed that the supplier was a bit disappointed with the behavior of the main contractor. Hence, trust in the customer–supplier relationship was not sufficient for the supplier to share cost information. Furthermore, the supplier had much power in technology issues and the main contractor accounted only for 7%

of the annual sales. In case 3, the openness of the supplier’s cost information was expanded to the whole network. The main reason for this was the sales increase promised to the primarily short–term and trade–oriented facility manager.

Three suppliers in the network took a totally different approach for cost management development with the main contractor even if the main contractor’s initial goals were the same with all suppliers. In addition, the supplier of case 1 was one of the customers of the supplier in case 3, and responsible for part of the volume increase for this supplier. Hence, it is reasonable to believe that the network approach to customer–supplier relationships (Håkansson & Snehota, 1989; Anderson et al., 1994;

Dubois & Pedersen, 2002) is appropriate also for cost management development analysis, instead of the use of a single purchasing portfolio.

On the basis of empirical cases, there seems to be a need to consider the nature of customer–supplier relationships in cost management development. In the cost management development projects, the main contractor selected important suppliers to be pioneers in cost management development. Process assessment in case 1 followed the idea of joint process assessment (Ellram, 1996) in strategic partnerships.

Balance of power and trust did not prevail in case 2. This and the lack of direct win–

win situation explains to a large extent the supplier’s unwillingness toward openness.

Because substitution is rather easy in the leverage relationship category, benchmarking could help in managing these purchases. Low unit cost was of great importance for the main contractor in this category (case 3).

Major differences in the case studies were explained by the nature and characteristics of each relationship. Cost information transfer and utilization depended on the balance of power between firms, on the trust between personnel, on the volume of firms’

mutual business, and on the quality of suppliers’ cost information. Although this could have been seen beforehand because all the issues mentioned have been described to influence the nature of customer–supplier relationships (Virolainen, 1998; Mohr & Spekman, 1994; Porter, 1980), the new finding was that a customer can

proceed with the objectives if an appropriate approach and incentives are applied with different suppliers.

The selection of the customer’s point of view for the cost reduction was supported by the case evidence, according to which inter–organizational cost management seems to be the customer’s responsibility: the customer carries mostly the burden of cost accumulation in the supply chain. The nature of customer–supplier relationships should be considered when setting goals for inter–organizational cost management development. Because cost management tool selection depends on the purpose of and the possibilities for the use of cost information, it is necessary to select which suppliers to involve in TC projects, for example, and which not.

At least five issues limit the generalization of the results of this particular study (article V): First, the relationships studied belong to the same network. The effect of a single customer on objectives and results might be severe. Second, the features of the theoretical frameworks were not put in priority order. Relationships might be completely different if this priority order were established and communicated to the interviewees. Third, the study was carried out in manufacturing industry. Cost pressure in today’s manufacturing makes it important for almost all firms to develop cost awareness. Fourth, a specific accounting situation may demand a certain focus in the use of cost information regardless of a customer–supplier relationship’s nature.

Fifth, in line with Dubois & Pedersen (2002), this study represents a critical and also limitedly studied approach of not recommending purchasing portfolios for all purchasing-related connections, such as inter–organizational cost management, for example.

6 CONCLUSIONS AND DISCUSSION