Proposing a Compact Instrument to Measure Supplier-Customer Relationships in the Context of TQM Activities

July 2002
Volume 9 • Number 3

Contents

Proposing a Compact Instrument to Measure Supplier-Customer Relationships in the Context of TQM Activities
by Mohammad Aghdasi and Hamid Noori, Wilfrid Laurier University

This article reports on a study of the factors that characterize a complete supplier-buyer partnership, and a more cooperative orientation in the channel. Data were collected for 33 elements of supplier-customer relationships from 205 Canadian manufacturing organizations. The authors used principal component analysis to provide a relatively compact instrument that allows researchers and practitioners to measure supplier-customer relations more effectively and efficiently. This model of factor extraction indicates that three major components account for most of the scale variance. These components are: 1) improvement activities, 2) long-term purchasing, and 3) market adjustment. The application of this model to supplier-buyer relations has brought to light two main issues. First, the relationships between OEMs and their key suppliers have focused mainly on long-term purchasing arrangements and market adjustment. Second, joint improvement activities have not been given adequate attention despite the relative importance of this dimension of supplier-customer relations.

Key words: empirical research, factor analysis, supply chain partnership, TQM

INTRODUCTION

Practitioners, industry experts, and industry governing bodies agree that cooperative relationships with suppliers are fundamental to the success of total quality management (TQM) efforts between supply chain nodes. For example, while various member companies of the European Foundation for Quality Management (EFQM) instigated vendor accreditation using different standards, they agree that they select suppliers they think they can trust, and that working together toward TQM is a road to future success (The TQM Magazine 1993). Godfrey (1995) has indicated 10 major quality trends, the third of which is the supplier partnership. He notes that many companies are including upstream suppliers and downstream customers in quality improvement efforts and planning and control activities. These companies are moving beyond the traditional contractual relationships that formerly constituted channel relations. Quality teams assembled among supply chain participants have become more common in the manufacturing sector. In fact, TQM is a major driver of the integrated supply chain orientation, which has become a frequently discussed option in many distribution channels (Axelson 1997).

Although there is agreement on the importance of such cooperative relationships, this pedagogy is not translating into better quality in North American manufacturing sectors, despite the fact that a growing number of North American manufacturing firms have established supplier partnerships and supplier development programs (Stuart and Mueller 1994). In fact, two-thirds of American managers think TQM has failed in their companies (Higginston and Wayler 1994). Therefore, it is necessary to carefully explore supplier-buyer relationships in order to recognize the extent of these partnerships, and to ultimately identify the dimensions that are critical to the implementation of TQM programs. In the authors’ opinion, the present literature does not adequately address this concern.

The significant contribution of this research is to identify the orthogonal factors that describe different dimensions of supplier-customer relationships based on a recent empirical study of Canadian manufacturing firms. Subsequently, this model will be used to measure the supplier-customer relationships in the context of TQM activities.

REVIEW OF THE LITERATURE

Literature on buyer-supplier relationships discerns between two types of relationships:

  1. The traditional relationship that is conditioned by the lowest bid price criterion. This is a competitive, arm’s length arrangement between supplier and buyer.
  2. Win-win partnering relationships. These are described as cooperative partnerships (comakership communication) in which one of the main goals is to obtain mutually beneficial results.

In general, many academics and practitioners view supplier partnerships as a key element in enabling both suppliers and buyers to reach levels of world-class competitiveness in a demanding competitive environment. For example, Began (1987) defines comakership as working together toward a common goal, which is based on the premise that each party can gain more benefits by cooperating. He argued that the individual company would incur fewer costs and enjoy greater success through collaboration than by pursuing objectives individually. Similarly, Robert (1998) argues “…a supplier partnership…involves a commitment over an extended time period, and includes the sharing of information along with a sharing of the risks and rewards of the relationship.”

While the partnering concept has received attention for a variety of reasons (Began 1987; Smith 1990; Stuart and Mueller 1994; Robert 1998), the literature is inconclusive in determining a common set of activities necessary to be undertaken to enhance supplier-customer partnerships. Following is an attempt to demonstrate the existing discrepancy in the literature.

Stuart and Mueller (1994) have found that cooperative buyer-supplier relationships were typically characterized by five attributes:

  1. A supply pool consisting of one or more preferred suppliers
  2. An alliance incorporating a credible commitment between the buying and selling firms
  3. Joint problem-solving activities
  4. An extensive information exchange mechanism between supplier and buyer
  5. Joint efforts to adjust to changes in marketplace conditions

Robert (1998) states that partners must have shared goals and work together to improve design, quality, and delivery. He concludes that the following elements are key to a successful supplier-customer partnership:

  1. Cross-functional teams
  2. A reduction in the number of suppliers
  3. Supplier certification requirements
  4. Fulfillment of the ISO 9000 certification
  5. A reemphasis on price as a supplier evaluation criterion

Lascells and Dale (1989) have identified the main barriers to establishing effective supplier-customer relationships in quality management. His findings are based on questionnaire data obtained from 300 U. K.-based companies that supply three major downstream customers in the automotive sector. The main barriers he has identified are poor communication and feedback between supply nodes, supplier complacency, and the tendency for buyers to have poorly defined and unstructured supplier quality improvement programs. Lascells and Dale conclude that an effective supplier development process requires the following elements:

  1. The institution of long-term purchasing contracts
  2. Trust, dependence, and the development of common goals
  3. A reduction in the number of suppliers
  4. The use of single and dual sourcing
  5. Consultation between supplier and customer concerning product design and engineering
  6. Joint problem-solving activities
  7. A deeper understanding of each other’s businesses
  8. Not emphasizing low price as the key for selecting suppliers

In a separate case study undertaken in the automobile industry, Smith (1990) concluded that the following elements were necessary for effective partnership relations:

  1. Work force empowerment. Managers should attempt to involve employees in processes in which they can contribute most to the attainment of objectives.
  2. Developing teamwork and flexibility
  3. Establishing quality as the most important consideration

Based on a case study of a U. K. company with a partnership agreement with an American firm, Scotts (1993) concludes that the inclusion of TQM activities in employee education and training was a key factor underlying successful partnership relations between the two companies. In a case study of the service industry, Flood and Isaac (1993) find that employee involvement is critical to viable supplier-customer partnerships. Similarly, in an unrelated case study, House (1990) develops a new approach to the delivery of information technology at ICL. He concludes that the success of this innovative approach hinges on strong supplier-buyer relationships, and shows four central constructs underpinning the manufacturing philosophy:

  1. Just-in-time inventory systems
  2. Employee involvement
  3. Supply chain integration
  4. TQM

Other perspectives reported in the literature include the following: Began (1987) argues that in the partnership environment, negotiations are facilitated and open. Price issues are discussed freely and in detail, and this leads to continuous cost and price reductions as a common objective between the two parties. Harrison (1990) discusses the role of quality and how it is attained in the supply chain. He considers electronic data interchange (EDI) as a major opportunity to support comakership supply. A report of the U. S. General Accounting Office (GAO). (Tyson 1992) indicates that while close supplier-customer relationships were manifested in a number of ways, the most profound activity in relationship development is the inclusion of suppliers in new product design. Finally, in their study, Richeson, Charles, and John (1995) reveal that there is a greater degree of information exchange and sharing among JIT partners than found in traditional channel arrangements.

Table 1 presents a summary and classification of 30 different partnership activities reported in the literature. It shows the similarities and differences reported in the literature with respect to the cooperative factors important in building supplier-buyer relationships.

THE SURVEY AND THE DESCRIPTION OF THE SAMPLE

The results reported in this article are based on a continuing study supported by the Social Sciences and Humanity Research Council of Canada. The overall study investigates the extent to which continuous collaborative improvement (CCI) activities are being implemented in the supply chains of Canadian industries. Several Canadian industries including the automotive, electronics, and aerospace sectors were examined to determine: 1) what CCI activities were being initiated, 2) which supply chain nodes were the most proactive in establishing these endeavors, 3) the most effective collaborative tools and processes, and 4) the effect such tools would have on the supply chain performance of participating companies.

A questionnaire was developed using the CCI model (see Noori 2001) to determine how the various supply chain members are collaborating. The survey instrument comprised six categories focused on: demographics, requirements imposed by customers, requirements imposed on suppliers, collaborative efforts, strategy, and results. Each section contained between 13 and 20 questions. The questions were designed to view participation and activities from both consumer and supplier perspectives.

The questionnaire was designed to pose clear questions and to take 15 to 20 minutes to complete. Once the questionnaire was designed, individuals from industry who had significant experience in supply chain management reviewed it. These practitioners also held a thorough understanding of the policies and procedures employed in the procurement of goods and services in their respective firms. Next, the proposed questionnaire was submitted to individuals in academia who had an interest in operations and supply chain management. These two groups evaluated the document for clarity, content, and completion time.

The final version of the questionnaire considered the feedback of all participants in the pilot study. The questionnaire contained an introductory section describing the intent of the survey and what was expected of the respondents. It indicated that respondents could remain anonymous, or they could include their name and address on the survey to have results forwarded to them in appreciation of their participation. For the purposes of this research, “the firm,” was defined as, “a business unit having an identifiable business strategy, a distinct top management group, and one or more target markets.”

A sample of manufacturing establishments was randomly drawn from a frame of the Business Opportunity Sourcing System (BOSS) electronic database. Overall, 1140 establishments were surveyed with 206 firms responded, resulting in a 19 percent response rate. The sample included companies with annual sales ranging from $5 million to $5 billion. The survey was mailed with a cover letter to VP-Operations of the selected companies detailing the deadline for submission and a stamped return envelope.

For this report, the analysis is limited to 33 of the survey questions (see the appendix for a list of the variables). These questions specifically focus on different cooperative activities that have been identified in related literature as activities that should be undertaken to foster a cooperative environment between buyer and supplier.

METHODOLOGY

The computer program SPSS was used to perform principal component analysis to search for orthogonal components to facilitate interpretation. (Principal component analysis is a factor extraction method used to form uncorrelated linear combinations of the observed variables.) First, the authors extracted components with eigenvalues greater than 1.00. Eight components were extracted, which accounted for more than 69 percent of the total variance. The remaining components, some of them with eigenvalues of less than 1.00, were deemed insignificant (that is, they did not explain as much variance). Table 2 shows components that accounted for more than 50 percent of total variance for all solutions.

Next, to provide an interpretable structure, varimax rotation of the original component matrix was specified. Varimax rotation is an orthogonal rotation method that minimizes the number of variables that have a high loading on each component, making interpretation of the components simpler. Although most of the loading variables in all of the component solutions were interpretable, the authors only investigated three component solutions as the most interpretable solutions. As Table 2 illustrates, the three components solution explains 50.784 percent of the total variance. The authors interpreted this to indicate that the three-component solution is reliable despite the fact that the eight components solution explains a slightly greater portion of the total variance.

Table 3 shows rotated component matrices for the three component solutions. In the authors’ approach, they used the following decision rule: An item was assigned to a given component if it had a loading factor of at least 0.50, with loading on all other components below 0.40. Using this principle, Table 4 shows the loading variables on each component.

RESULTS

For the three-component solution, items loading on empirical component 1 represent collaboration and cooperation in performing improvement activities at both the operational and managerial planning levels. The items measure close cooperation, extensive information sharing, and enhanced coordination of interdependent tasks. Thus, a careful study of the items loading on this component suggests that it represents what have been termed “improvement activities.” Items loading on component 2 are related mostly to long-term purchasing agreements with a few key suppliers. This component will henceforth be identified as “long-term purchasing.” However, items loading on component 3 are predominantly related to “market adjustment.” Table 5 shows the selected labels and corresponding loading variables.

If a measurement instrument consists of a number of individual measurements, (items), its discriminate and construct validity may be improved by creating adapted instruments consisting of fewer measurements, which are merely the means of the original measurements. The research team applied this principle by using the means of the variables loading on a given component to measure that component. Table 6 illustrates the means and standard deviations of each component. The components are orthogonal, and standard deviations are close to each other. Therefore,the mean is a good criterion to employ in determining the proportional level of importance of each of these components in the selected Canadian industries.

The application of this model to Canadian industry indicates that all three of the aforementioned aspects of supplier-customer relationships need improvement. However, the item titled, “improvement activities,” needs more attention than do “long-term purchasing,” and “market adjustment.” In an attempt to support this conclusion, the authors employed an analysis of variance to show that there are statistically significant differences between these three factors (see Table 7). As it is shown, the mean difference between improvement activities and long-term purchasing is 0.9787, with the p value of 0.00. Table 7 also demonstrates that there is a significant difference between these two factors. This also means there are significant differences between “improvement activities” and “market adjustment” (the mean difference is 0.2717 with the p value of 0.001) and between “long-term purchasing” and “market adjustment” (the mean difference is 0.7070 with the p value of 0.00). In other words, the relationships between suppliers and downstream customers in the Canadian manufacturing sector focus predominantly on long-term purchasing and supply agreements, and market adjustment activities. Joint improvement activities are not given adequate resources and management attention. This conclusion supports the findings of Jeffery et al. (1998). In their study of 435 supplier-automaker relationships in the United States, Japan, and Korea, they concluded that there is a significant difference between the U. S. original equipment manufacturers (OEMs) and their (primarily tier 1) suppliers (which is mainly based on an “arm’s length” relationship), and their counterparts in Japan (which is built on the basis of a long-term “partnership”).

In the United States, however, relationships characterized as “partnerships” do not differ significantly from those described as “arm’s length” arrangements. The only measurable difference between these two arrangements in American industry was that the length of supply contracts typically awarded to “partners” was of a longer duration. In other words, Jeffery et al. showed that at least in the American automobile industry, the relationships between suppliers and downstream customers, which they call “arms length” relationships, focus predominantly on elements of partnership such as “long-term purchasing and supply agreements,” and “market adjustment activities.” Elements such as “joint improvement activities,” which are reserved for “partner relationships,” are not given adequate resources and management attention.

CONCLUSIONS

The existing literature clearly argues that cooperative activities and partnerships are key determinants of the success or failure of TQM efforts in the supply chain. Many North American firms, however, have established supplier partnerships with little or no relationship to their quality improvement programs. This article is an attempt to study the improvement factors that significantly influence a truly cooperative environment between OEMS and their suppliers. It is argued that such understanding would be beneficial to companies and managers searching for more effective relations with suppliers in developing joint supply strategy, cooperation in improvement activities, and joint human resource development.

A sample of manufacturing establishments was randomly drawn from a frame of the BOSS electronic database. Overall, 1140 establishments were surveyed. Two hundred and six firms responded, resulting in a 19 percent response rate. For this report, the analysis was limited to 33 of the survey questions (see the appendix). The results indicate that three major components account for most of the scale variance. These components are “improvement activities,” “long-term purchasing,” and “market adjustment.” This model of factor extraction produced a relatively compact instrument that allows researchers and practitioners to measure supplier-buyer relationships more effectively and efficiently.

The application of this model to Canadian industry indicates that all three of the aforementioned aspects of supplier-customer relationships need improvement. However, the item titled “improvement activities,” needs more attention than do “long-term purchasing,” and “market adjustment.” The authors’ study also indicated that the relationships between suppliers and downstream customers in the Canadian manufacturing sector focus predominantly on long-term purchasing and supply agreements, and market adjustment activities. Joint improvement activities are not given adequate resources and management attention. This conclusion supports the findings of Jeffery et al. (1998) who have found that in the U. S. relationships characterized as “partnerships” do not differ significantly from those described as “arm’s length” arrangements.

Acknowledgment

A grant from the Social Sciences and Humanities Research Council of Canada supports this research. The comments from David Hemsworth on an earlier draft of this article are acknowledged.

References

Axelson, B. 1997. Plant engineers take on integrated supply. Industrial Distribution 86, no. 5: 62-66.

Began, J. 1987. What is co-makership? The International Journal of Quality and Reliability Management 4, no. 3: 47-57.

Flood, R., and M. Isaac. 1993. Co-makership for small and medium-sized companies: The case of cosalt holiday homes. The International Journal of Quality and Reliability Management 10, no. 8: 25-41.

Godfrey, A. B. 1995. 10 quality trends. Executive Excellence 12, no. 7: 10-12.

Harrison, A. 1990. Co-makership as an extension of quality care. The International Journal of Quality and Reliability Management 7, no.2: 15-23.

House, E. 1990. Customer-supplier partnerships in the IT market. The International Journal of Quality and Reliability Management 7, no. 2: 39-46.

Jeffrey, H. et al. 1998. Strategic supplier segmentation: The next best practice in supply chain. California Management Review 40, no. 2: 57-77.

Lascells, D. M., and B. G. Dale. 1989. The buyer-supplier relationship in total quality management. Journal of Purchasing and Material Management (Summer): 10-20.

Noori, H. 2001. A Canadian perspective of collaborative supply chain improvement programs. Canadian J. of Administrative Sciences, Under Review.

Robert, J. V. 1998. Supplier partnership: A case study. Production and Inventory Management Journal 39, no. 1: 30-35.

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Scotts, H. 1993. A strategy for partnership in total quality service. International Journal of Contemporary Hospitality Management 5, no. 1: 1-6.

Skutski, K. J. 1992. Conducting a total quality communications audit. The Public Relation Journal 48, no. 4: 32-36.

Smith, G. B. 1990. Co-makership: The Japanese success story in British environment. The International Journal of Quality and Reliability Management 7, no. 2: 7-15.

Stuart, F. I., and P. J. Mueller. 1994. Total quality management and supplier partnership: A case study. International Journal of Purchasing and Materials Management (Winter): 9-23.

The TQM Magazine. 1993. Quality for all. The TQM Magazine 5, no. 5: 7-9.

Tourish, D. and P. Irving. 1995. Integrated communications perspectives and practice of total quality management. International Journal of Health Care Quality Assurance 8, no. 3: 7-15.

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BIOGRAPHIES

Mohammad Aghdasi is an associate professor of operations research in the Department of Industrial Engineering, Tarbiat Moddares University in Tehran, Iran. He received his doctorate from Japan and has worked extensively in the areas related to quality management. He was a visiting scholar at Laurier Business School in 1999-2000. He can be reached at aghdasi@hotmail.com .

Hamid Noori is the Laurier chair in enterprise integration and technology management and a professor of operations at Laurier School of Business and Economics, Wilfrid Laurier University, in Waterloo, Canada, and a visiting professor at Haas School of Business, University of California-Berkeley. His research interests include management of innovation and technological change, technology transfer and commercialization, network manufacturing and integrated supply chain, fast cycle product/service design, and operations strategy and benchmarking. Noori’s publications have appeared in many journals including Management Sciences, Naval Research Logistics, IEEE Transactions in Management, Decision Sciences, International Journal of Production Research, Technovation, OMEGA, and Interfaces. He can be reached at hnoori@wlu.ca .

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