Controls in Strategic Supplier Relationships

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Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the relevant copyright, designs and patents acts, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers.

CONTROLS IN STRATEGIC SUPPLIER RELATIONSHIPS SURESH CUGANESAN MCom (Hons) (UNSW) is a lecturer in management accounting at the University of New South Wales. He has also taught financial accounting. Suresh's current research includes accounting technologies in the construction of risk in organisations, focusing on the measurement of value and the management of risk in financial markets. MICHAEL BRIERS BCom (Tas) PhD (UNSW) is a senior lecturer in the School of Accounting at the University of New South Wales. He both teaches and researches management accounting. In 1998, Michael was awarded the Australian Award for University Teaching in the Economics, Business and Related Studies category. WAI FONG CHUA BA PhD (Sheff) ACA CPA has been a professor in the School of Accounting at the University of New South Wales since 1994, and has also taught at the universities of Sheffield and Sydney. Her current research interests are in international accounting, accounting history and the philosophy of the social sciences as related to management accounting. She has been published widely in international journals.

THE AUSTRALIAN CENTRE FOR MANAGEMENT ACCOUNTING DEVELOPMENT (ACMAD) is a network driven and financed by a membership of almost 100 organisations and universities. Its mission is to stimulate and facilitate learning about the innovative management of organisational resources. This series is one expression of its mission. ACMAD welcomes inquiries. Further information about the Centre is provided on its website at: www.ace.unsw.edu.au/acmad THE INSTITUTE OF CHARTERED ACCOUNTANTS IN AUSTRALIA believes that the Strategic Resource Management series will contribute to the clarification of a range of significant issues facing managers and business professionals in the future. The practical insights and distinctive perspectives offered will greatly benefit our members and will add value to anyone who is a strategic business thinker. Other books in the series: Innovative Management Accounting: Insights from practice Maria Barbera, Jane Baxter and William Birkett Organisational Learning and Management Accounting Systems: A study of local government Louise Kloot, Maria Italia, Judy Oliver and Albie Brooks Shareholder Value Demystified: An explanation of methodolgies and use Maria Barbera and Rodney Coyte

STRATEGIC RESOURCE MANAGEMENT

Suresh Cuganesan

Michael Briers

Wai Fong Chua

CONTROLS IN STRATEGIC SUPPLIER RELATIONSHIPS

A UNSW Press book Published by University of New South Wales Press Ltd University of New South Wales Sydney 2052 Australia www.unswpress.com.au © ACMAD 1999 First published 1999 This book is copyright. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Inquiries should be addressed to the publisher. National Library of Australia Cataloguing-in-Publication entry: Cuganesan, Suresh. Controls in strategic supplier relationships. Bibliography. ISBN 0 86840 721 6. 1. Metal trade — Australia — Management. 2. Industrial procurement — Australia. 3. Strategic alliances (Business) — Australia. 4. Relationship marketing — Australia. I. Chua, W.F. (Wai Fong). II. Briers, Michael. III. Title. (Series: Strategic resource management). 658.802 Printer BPA, Melbourne

CONTENTS PREFACE ix INTRODUCTION

xi

1 • • • •

TRADITIONAL AND STRATEGIC RELATIONSHIPS 1 Collaborative forms 2 Portfolio analysis: a guide to developing relationships 5 Benefits of strategic relationships 6 Controls 7

2 • • • • • •

FIRM A: ALUMINIUM PRODUCTS 13 Background to developing strategic relationships 13 Initial reliance on trust 15 Other controls 17 Initial benefits 17 The need for formal controls 19 Developing formal controls: the forklift project 21

3 • • • •

3 FIRM B: STEEL SUPPLIER 26 Trust and formal controls 28 Other controls 29 Benefits of strategic relationships 31 Redesigning the contract process 32

CONCLUSION 35 SELECT BIBLIOGRAPHY 41

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STRATEGIC RESOURCE MANAGEMENT

Organisations are devices for creating value through the effective use of resources. While they need to create value for all contributors of resources, a premium is placed on value creation for customers and shareholders. After all, an organisation is unlikely to be able to offer inducements to other resource contributors if it does not provide value to its customers. Also, shareholders are aware that failure in value creation for customers will be reflected in the value that they can receive. Value creation for customers and shareholders, then, is broadly regarded as the litmus test for judging organisational effectiveness. Value creation by organisations takes place against a backdrop of fast moving competition in resource and service markets, and increasingly rapid shifts in the value expectations of customers. Under these conditions it is insufficient to meet or beat the competition with present service offerings; new service offerings have to be invented and made competitive, as previous offerings cease to be serviceable and are thus devalued. As service offerings change, so will the materials, technologies, skills and processes that are needed to produce them. New service offerings require different constellations of resources and new relationships with new resource contributors. An organisation's strategies define how it proposes to create value for customers in terms of its service offerings over the immediate period and the opportunities it seeks over a longer term. Whether or not an organisation will be successful in these endeavours will depend on its capabilities for doing so. Strategies, then, have to deal with both the known (the creation of value through present service offerings) and the unknown (the invention of service offerings that will create value in an as yet unknown future). And capabilities need to sustain both the organisation's present effectiveness in offering services and its future renewal by capitalising on opportunities as they emerge. An organisation's success in strategy realisation or renewal will be dependent on its effectiveness and creativity in managing resources. This places a premium on strategic resource management and on new ways of understanding organisational resources, resourcing and resourcefulness. What are an organisation's resources, what forms do they take and how can they be used effectively and not wasted? What constellations of resources constitute strategic capabilities, useable now in meeting the competition and converting possibilities into future opportunities? And what strategic capabilities are sufficiently distinctive to constitute the core competences underlying an organisation's continuing identity? These questions are answered in the Strategic Resource Management Series. Each volume will address them in relation to particular subject matter, drawing on relevant theories and providing illustrations from contemporary organisational practice.


PREFACE

Until recently, competition has been held to be the driving force behind industry performance. This belief, adapted from Darwinian ideas about ecology and evolution, presumed that survival went to the fittest in a competitive world. However, as ecologists are quick to point out, competition is not the only survival mechanism in nature. Co-operation also is a common and important survival strategy, which is increasingly being used in business in Australia and overseas (Bubna-Litic 1994, p. 1).

Ideas of competition are rooted in independence. However, as Porter (1990) pointed out, the value chains of suppliers and buyers are not independent, but rather interdependent. The classic story about interdependence is that of the small birds which feed on the parasites in the mouths of crocodiles. The crocodile forebears from eating the bird for the benefit of relief from parasites. (Bubna-Litic 1994, p. 90). The analogy in the business world is that collaboration between two interdependent organisations can be beneficial to both. Collaboration is achieved through relationships. Organisations devise different sorts of relationships: some are formalised through contractual arrangements; others are informal understandings; most, in all probability, include formal and informal elements. Regardless of the formality or informality of the arrangements, the outcomes of a relationship need to be reviewed and the processes adjusted as circumstances or the expectations of the parties change. That is, the relationship needs to be managed. Important elements in management are controls which range from socalled `soft' or communal controls (such as trust, socialisation mechanisms, and so on) to market-based contractual and accounting mechanisms. This book focuses on one type of collaborative relationship: that established by an organisation with its strategic suppliers. Such relationships provide an organisation with an additional resource which can be used to generate value for customers and shareholders. Like all the resources of the firm, this resource must be effectively managed. The study is the result of an investigation undertaken, over a period of time, by Suresh Cuganesan, a staff member of the School of Accounting at the University of New South Wales, in two large Australian organisations which established strategic supplier relationships. The study was limited to these two organisations and did not include any direct discussions with the supplier firms. Suresh's investigation was conducted under the supervision and guidance of Dr Michael Briers and Professor Wai Fong Chua. The authors acknowledge the financial support of ACMAD in undertaking the research and thank the two firms which agreed to participate in the study. Thanks are also expressed to two independent reviewers for their helpful comments on earlier drafts of the paper.


INTRODUCTION

Rapid changes in the business and economic environment of advanced industrial societies are an important stimulus to alternative forms of work organisation. In the light of increasing internationalisation, mass deregulation and heightening competition, a growing number of firms have turned to inter-organisational collaboration in the search for a competitive edge. These new forms of collaboration have gained considerable attention and prominence as the way of the future, and their rapid proliferation both internationally and in Australia is testimony to this. In Australia, for example, a survey on business linkages and networks observed that `close to one-third of Australian manufacturing firms are currently involved in core forms of business cooperation ... [and] up to twothirds engage in either core or marginal forms' (Bureau of Industry Economics 1995, p. xvii). The same study reported that 62 per cent of senior management surveyed believed that the frequency of cooperation had increased while more than 70 per cent felt that the need for co-operation had risen in strategic importance. Further, a growing number of government authorities worldwide have been sponsoring initiatives to foster the growth of collaborative forms. In the United States, for example, a consortium of business assistance organisations, labelled ÙsNet' and funded partially by government, works to accelerate collaboration among small and medium businesses. Other programs of a comparable nature exist in the United States and throughout Europe. Similarly, Australian government authorities have funded the `Business Network Program' with the objective to `... establish business networks as an everyday business practice with the overall aim of increasing the competitiveness and capabilities of Australian businesses' (AusIndustry 1996, p. 16). Collaborative organisational forms are seen by governments as the vehicle to future competitiveness and economic prosperity. The importance of inter-organisational collaboration is thus being increasingly recognised. In particular, much attention has been focused on the collaborative elements of relationships within supply chains. A large and growing number of firms have adopted new strategies with respect to suppliers and/or created strategic supplier relationships (SSRs). As long ago as 1993, Asmus and Griffin reported: Many businesses have recognised the strategic importance of optimising their supply management processes. Companies as diverse as Toyota, Ford, HarleyDavidson, Detroit Diesel, Black & Decker, Yamazaki Mazak, Motorola, Bose and Xerox are developing effective new ways for their internal functions to work together with suppliers in optimising product design, development, manufacture and distribution. Such improvements have enabled some to slash their development times by as much as 40 percent, increase inventory turns from six to


xii

over 50 a year, and reduce the cost of purchased materials by between 15 and 35 percent. (Asmus and Griffin 1993, p. 63)

In Australia, over 80 per cent of collaborative arrangements comprise a cooperative relationship between supplier and customer (Bureau of Industry Economics 1995). Such popularity indicates that certain benefits are generated by these relationships. Despite the popularity of SSRs, however, little research has been undertaken thus far. As Hopwood (1996, p. 590) notes, `concerns with quality, cost and delivery are acted upon across supplier chains ... [but] to date accounting research has largely ignored such changes and their implications for financial decision making and control'. In fact, little is known about the control in SSRs and the manner in which organisations realise the benefits of engaging in such relationships. The popular prescription today is that trust should be the major, and desirably the only, control mechanism adopted in SSR relationships, as it is consistent with the conception of SSRs as essentially collaborative forms. However, trust is not the only control mechanism available. Other mechanisms which can be used instead of, or in conjunction with, trust range from formalised accounting and contractual mechanisms to more informal socialisation processes. To understand how the SSR form may confer benefits, Chapter 1 discusses the nature of SSRs, compares SSRs with market contracting and vertical integration options, and discusses how SSR forms are developed. It then identifies the associated benefits, and examines the controls available to organisations. Chapters 2 and 3 then explore how organisations manage their SSRs and the choice of controls used in this process by relating the experiences of two Australian manufacturing organisations when creating, and controlling their SSRs.

CHAPTER

1 TRADITIONAL AND STRATEGIC RELATIONSHIPS

Many authors have differentiated `strategic' from so-called `traditional' customer-supplier relations along a number of dimensions, as illustrated in Table 1. Table 1 Comparison of traditional and contemporary relationships Traditional customer-supplier relationships

Contemporary strategic supplier relationships

•

•

• • •

•

•

independent strategy and plan development limited information sharing limited joint problem solving separate and unsynchronised accounting, measurement, and reward systems mutual ignorance by both parties about the needs of limitations of the other party inefficient resource utilisation

Source: Ashkenas 1990.

• • •

•

•

co-ordinated business and operational planning widely shared information joint problem solving consistent accounting, measurement and reward systems a consultative process for determining the specifications for the transfer of goods/services shared resources


2

Further, firms moving towards SSRs have begun to rationalise and consolidate their supplier bases and to evaluate existing suppliers on diverse criteria such as: key performance indicators potential performance levels technological expertise competencies and skills organisational culture. In addition, long-term arrangements with approved suppliers are being implemented in an integrated way with the provision of supplier training and improvement programs. Many firms have thus moved from a situation where the transfer of the subcontracted goods and services in return for monetary rewards was the only point of contact between the buyer and the supplier, to an increasing reliance on technology and information, more stringent auditing of suppliers and selection procedures, and suppliers becoming more involved in the buyer's product or service and process design. In these ways, SSRs incorporate notions of bilateral learning over the longer-term with an emphasis on transferring knowledge, skills, funding, and assets. Thus, in shifting the emphasis from traditional to strategic supplier relationships, firms are recognising the potential value in strengthening customer-supplier linkages with a long-term emphasis.

Collaborative forms From the preceding discussion, the SSR form seems to be neither vertically integrated or arm's-length market contracting. Instead, it shares characteristics of both. This view is supported by both Powell (1990) and Ring and Van de Ven (1992), who compare collaborative forms to the arm's-length market contracting and vertical integration alternatives (Table 2). From Table 2, the relationship in market forms of organisation is driven by a contract designed to facilitate the one-time economically efficient transfer of property rights (Ring and Van de Ven 1992). In market contracting, the terms of exchange between the parties are clearly defined with the mode of communication being the mechanism of price. Furthermore, investments and exchanges tend to be short-term and non-specific, and can be transacted among many parties, thereby resulting in the high levels of flexibility associated with these forms. The environment surrounding market contracting is one of precision and suspicion, with the parties not being significantly committed to each other and, in fact, making independent decisions and choices. In addition, the parties to the transaction

TRADITIONAL AND STRATEGIC RELATIONSHIPS

3

Table 2 Distinguishing characteristics of forms of organisation/relationship Organisational form

Market contracting

Vertical integration

Inter-organisational collaboration

Normative basis

Contract, property rights

Employment relationship

Complementary strengths

Means of communication

Prices

Routines

Relational

Degree of flexibility

High

Low

Medium

Amount of commitment among the parties

Low

Medium to high

Medium to high

Tone/climate

Precision and/or suspicion

Formal, bureaucratic

Open-ended, mutual benefits

Participant preferences or choices

Independent

Dependent

Interdependent

Nature of exchange of property rights

One-time transfer

On going production and rationing of wealth

Sustained production and transfer of property rights

Terms of exchange

Clear, complete and monetised. Sharp in by agreement and sharp out by pay and performance

Authority structure (superior hires and subordinate obeys or quits the employment relationship)

Uncertain, open and incomplete. Plans for bilateral learning. Safeguards and conflict resolution

Transaction specific investment

Non-specific

Idiosyncratic

Mixed and idiosyncratic

Temporal duration of the transaction

Simultaneous exchange

Indefinite

Moderate to long term

Status of the parties

Limited, non-unique relation between legally free and equal parties

Structural-functional command obedience relationship between legally unequal parties

Extensive, unique socially embedded relation between legally equal and free parties

Mechanisms for dispute resolution

External market norms and societal legal system

Internal conflict resolution by fiat and authority

Endogenous, designed by the parties and based on trust

Relevant contract law and governance structure

Classical contract. Market governance

Employment contract. Unified governance

Relational contracts. Bilateral governance

Adapted from Powell 1990; Ring and Van de Ven 1992.


4

are said to be legally equal and free. Consequently, social relations between parties tend to be limited as developing them can be costly (Ring and Van de Ven 1992). As a result of these characteristics, this non-unique relationship between legally equal parties is most efficiently governed by market norms, a competitive market place, and formal contractual mechanisms supported by the societal legal system. Forms of vertical integration, on the other hand, are primarily concerned with the production of wealth or the rationing of resources among superiors and subordinates (Ring and Van de Ven 1992). With vertical integration, the terms of exchange are derived from authoritarian structures and routine, which in turn stem from the employment contract. The exchanges and investments in this form are highly idiosyncratic and, as a result, there is a low degree of flexibility in the relationship. Also, the climate in the vertical integration form is seen as formal and bureaucratic, with the parties being significantly committed and dependent on each other. In addition, the relationship is indefinite and can be typified as a command-obedience relationship between legally unequal parties. Consequently, these forms are said to be governed by the employment contract, in conjunction with internal conflict resolution by fiat and authority. In contrast to the above forms, collaborative forms are seen as occurring as a result of firms pursuing a diverse set of objectives involving reciprocal dependencies which require co-operation (Powell 1987; Ring and Van de Ven 1992). Transactions occur neither through discrete exchanges nor by administrative fiat, but through networks of participants engaged in reciprocal, preferential, mutually supportive actions (Powell 1990). In Table 2, it is stated that collaborative forms are grounded in an environment based on notions of mutual benefits, win-win solutions and interdependencies, with the perspective being medium- to long-term. Furthermore, the objective of the relationship is identified as being the utilisation of complementary strengths in order to achieve sustained production and transfers of property rights (Ring and Van de Ven 1992). In these relationships, there also exist idiosyncratic investments and exchanges which cannot be clearly specified in advance of the transaction's execution. Consequently, it is the relationship which serves as the communication device. Although having similar levels of commitment as vertical integration, collaborative forms possess greater levels of flexibility. This is largely due to participants having the freedom to transact with other parties if they so desire. For example, participants in an SSR can conduct business with other suppliers, and suppliers can also deal with other organisations if they believe that this course of action is warranted (Jarillo 1988; McMillan 1990).


5

Portfolio analysis: a guide to developing relationships The development of SSRs requires investments of time, effort and resources and may not be appropriate in all situations. Consequently, organisations need to know when to create SSRs. Portfolio analysis methodology focuses an organisation on understanding and categorising its portfolio of supplied inputs in determining supply strategies. The various inputs are analysed along two dimensions: value and market criticality. The value of an input to the organisation is measured by its profit impact, annual spend, impact on business objectives, or some composite measure. The market criticality of an item refers to the availability of alternate suppliers for that product or service in the market. (Although many different variations of portfolio analysis are used, the central notion of categorising an organisation's portfolio of inputs is relatively constant.) Categorising supplied inputs along these two dimensions yields four quadrants. In the àcquisition' quadrant, spend is low and there are many potential suppliers. Here portfolio analysis urges an emphasis on efficiency and the systemisation, standardisation and simplification of the purchase wherever possible. Short-term relationships are usually entered into in this quadrant. In the `constrained' quadrant, low spend is combined with a few suppliers. Here portfolio analysis advocates an emphasis on price and specifications by

Figure 1 Diagrammatic representation of portfolio analysis


6

the organisation, with little importance attached to the strengthening of ties with the supplier. Short-term relationships feature in this quadrant although this may vary depending on the availability of alternative suppliers. In both the `leverage' and `strategic' quadrants, where the annual spend is high, it is argued that the quality and the type of service as well as the expertise and knowledge that a potential supplier can provide become more critical. Consequently, portfolio analysis prescribes that increased attention and resources are devoted to managing the supplier. The time frame for relationships in the leverage quadrant is usually medium-term, and the exploitation of full purchasing power as well as active use of supplier substitution (if required) is advocated. In the strategic quadrant, in particular, where the annual spend is high and the number of suppliers are few, portfolio analysis advocates the development of SSRs. In these circumstances, transfers of knowledge and personnel, the sharing of cost and process information and the building of long-term relationships are all seen as beneficial to the buyer organisation.

Benefits of strategic relationships A number of benefits have been ascribed to the SSR collaborative form as an explanation of its rapid popularity. Following Lascelles and Dale (1990) these include: less variation in component characteristics simplified and more effective communication reductions in paperwork, handling, inspection and delivery costs shorter delivery lead times less schedule interruption lower inventory levels speedier implementation of design changes access to specific technology, skills and expertise stable prices. SSR participants themselves claim significant benefits. In relation to collaborative forms in general, the Bureau of Industry Economics survey (1995) found that over 80 per cent of firms claimed that they had increased their profits and market knowledge as a result of their collaborative arrangements. Three-quarters of the firms surveyed had also obtained benefits in product development, improved quality, new domestic customers or suppliers, access to technology and improved production processes. Turning to SSRs in particular, the same survey reported that, as result of their SSRs, over half of the surveyed firms experienced increased turnover and profits as


7

well as improved technology, customer service, and quality. Over 30 per cent of firms also reported improved employment, productivity, exports and price. The achievement of these benefits is not without effort by both parties. From the buyer organisation's point of view, the realisation of the above benefits requires the supplier to act in the interests of the buyer. If SSRs are pure collaborative forms, conflicts of interests can be assumed away and issues of control do not arise. If this is not the case however, the delegation of responsibility for performing processes previously sourced internally to the supplier may result in a loss of direct control over these processes. Buyer organisations then have to achieve control over suppliers in order to retain control over organisational processes.

Controls When examining the manner in which the potential conflicts are resolved and the benefits of collaboration attained, the existing literature on collaborative forms and SSRs has been preoccupied with a reliance on trust. For example, the SSR characteristics described in Table 2 identify the most appropriate forms of conflict resolution are internal, trust-based, bilaterally designed and governed to preserve the relationship and to ensure that both the efficiency and equity sought in the long-term are realised (Ring and Van de Ven 1992). It is argued that norms of reciprocity and trust are central to SSRs, and that mutual dependence between exchange partners promotes trust (Bradach and Eccles 1989). In contrast, arm's-length market contracting and vertical integration tend to rely predominantly on other controls — price and authority respectively — with both supported by contractual mechanisms and legal sanctions (Table 3). Table 3 Types of control Formal controls

Informal controls

accounting measures

socialisation

contracts relative volume of business market competition authority

These largely formal controls represent potential alternatives to trust in the management of SSRs. The total set of controls available to the buyer organisation is summarised in Table 4.


Table 4 Control Characterbased trust

Process-based trust

Accounting controls

Contracts

Market control: Volume of business

Market control: Competition Authority mechanisms

Socialisation mechanisms

Description Involves the identification, classification and evaluation of the `character' of the supplier organisation. This character evaluation then forms the basis of predictions and expectations about the future behaviour of the supplier and, consequently, a decision to initially trust the supplier. This acts as a control by enabling mutually shared expectations about the role of each participant in the relationship. Relates to the norms of reciprocity and behaviour which emerge among participants in an exchange relationship. These norms provide common expectations on which the exchange is founded. They act as controls by enabling the expectation that the supplier will refrain from opportunistic behaviour. Entails performance measurement and monitoring. They enable control by providing knowledge about the supplier's current performance which can then be evaluated against expectations or standards. They provide both a historical frame of reference and a system of accountability. Includes contractual documentation, clauses and provisions, and also supporting schedules referred to in the contractual document. They act as controls because the supplier is legally bound to comply with the contract. The relative volume of business held with the supplier can act as an incentive for the supplier to refrain from self-interested and opportunistic behaviour. Where the volume of business is significant, the supplier will be motivated to retain that business and the revenue it represents. Consequently, the volume of business acts to control the supplier through the alignment of interests. Involves the comparison and evaluation of a supplier's performance against the marketplace. The marketplace and alternative suppliers provide a standard by which the supplier's performance can be evaluated. Involves the definition of rules and regulations which constrain behaviour to an àcceptable' range. These rules, coupled with the vesting of authority in specific organisational positions, act as a control by facilitating punitive sanctions in the event of non-compliance. This may involve the imposition of monetary penalties as well as actions such as suspensions and bans from the buyer's facilities. Comprised of the informal information systems between buyer and supplier personnel, suppliers being on-site, and the various inductions suppliers have to undergo. They achieve control over suppliers through the inculcation of norms and a culture similar to the those of the buyer.

8


9

Trust The notion of `trust' can mean different things to different people. However, the various definitions surround a notion of dependability or reliability on others. For example, one popular definition is that trust comprises expectations common to all economic exchange participants (Zucker 1986). Where these common expectations are strong, the level of trust is high and participants in a relationship both know and feel compelled to abide by these common expectations (Neu 1991b). Where the common expectations are weak, a low level of trust exists and participants know or understand the common expectations but do not necessarily feel compelled to follow them (Neu 1991b). A more comprehensive definition sees trust as a particular level of the subjective likelihood with which a party assesses that another party or parties will perform a particular action, both before the first party can monitor such action or independent of its capacity to do so, and in a context in which it affects the first party's own action (Gambetta 1988, p. 217). Further, there is some threshold level of trust which, if reached, will result in a participant in a relationship engaging in co-operation. This required threshold level varies between situations and is dependant on: the context of the situation the level of uncertainty information about the other participants in the relationship the risk of co-operation the attractiveness of alternatives to co-operation (Gambetta 1988). According to Zucker (1986), trust can be generated by three mechanisms. These are process-based, character-based, and institutional-based. These three form the major sources of trust. Process-based trust depends on past and expected future exchanges and transactions. As time passes, norms of reciprocity and behaviour emerge through repeated interactions amongst a group of participants in economic exchange, which provide common expectations on which the exchange is founded. Character-based trust relies on characteristics such as ethnicity, gender and age. These characteristics provide indications of membership in a common cultural system and shared background expectations (Zucker 1986). They also provide a basis from which predictions of how individuals with certain characteristics will behave in specific situations can be made (Neu 1991a). Consequently, character-based trust gives rise to expectations both within and across groups, with the former likely to be stronger due to the denser and tighter nature of intra-group relationships.


10

Institutional-based trust results from common expectations which in turn are generated from institutional practices that are largely taken for granted by society (Meyer and Rowan 1977). Trust is embedded in institutional practices that themselves are accepted as `social facts'. Consequently, institutional-based trust can be said to exist in all forms of economic exchange. Market transactions, hierarchies and networks all rest on a set of background norms and values which are derived in turn from wider institutional practices. The possibility of legal action where there is a breach of contract is one example of background norms, which derive from wider societal structures and produce trust by providing formalised rules that govern the exchange. These background expectations are relatively common to different forms of economic organisation. Furthermore, in contrast to process-based and character-based trust, institutional-based trust depends less on the specifics of the particular exchange and exchange participants. In fact, whereas process-based trust and characterbased trust depend on a small number or groups of relatively homogenous exchange participants, institutional-based trust is derived from wider institutional structures and practices, and remains largely unaffected by the specifics of the particular exchange. (As we are primarily interested in SSRs and the levels of trust across different relationships, we shall not be pursuing the institutional-based trust concept further.) In summary, trust is seen as possibly emerging from recurrent transactions (process-based), generated from social identity (character-based), or tied to formal social structures (institutional-based). According to this discussion, inter-organisational trust arises from previous experience, and social and cultural norms. It is also derived from external institutional structures and practices. Hence, trust is viewed as emergent or derived. The main reasons why trust has received so much attention in discussions on collaborative forms is the perception that trust engenders co-operation: it facilitates open information sharing and communication, mutual learning, relationship-specific investments and it eliminates the need for extensive contracting or monitoring costs. However, a reliance on trust does have potential drawbacks. For example, relying on trust means an organisation does not have any extensive sanctions to impose on a non-performing supplier (apart from ending the relationship which is costly in terms of the loss of investments in the relationship, costs incurred in finding a new partner, and any switching costs). Furthermore, the level of performance required is left implicit and thus the question of what is `non-performance' is blurred and lacks clear definition. Also, when trust is misplaced, there are potential drawbacks to the


11

organisation in terms of the costs of supplier opportunism, that is the risk that the supplier learns the organisation's competencies and either integrates forward, sells to the buyer organisation's final customers, or diffuses the buyer's expertise throughout the industry by passing knowledge on to its other customers (Jarillo and Stevenson 1991). Consequently, while beneficial, a primary reliance on trust does have potential drawbacks. Reliance on trust mechanisms may, however, be balanced with other forms of control in SSRs to avoid the potential pitfalls of misplaced trust. These other forms of control (accounting and contractual controls, market-based volume of business and competition controls, and authority and socialisation mechanisms) are outlined below. Accounting and contractual controls Accounting controls entail performance measurement and monitoring. Control is achieved through the buyer organisation evaluating the supplier's performance against expectations or standards. This system of measurement and evaluation provides a history of the supplier's performance as well as a system of accountability. Contractual controls comprise all legally binding clauses and provisions within the contract. These act as a control because the supplier is legally bound to comply with the contractual document and the requirements contained therein. Market-based volume of business and competition controls Control through volume of business acts by aligning supplier's goals with those of the buyer. The more important a buyer's volume of business is to the supplier, the more important is the retention of that business. Consequently, the supplier is more likely to behave in accordance with the buyer's objectives and less likely to engage in self-interested behaviour. Market competition can also act as a control over suppliers. This involves the comparison of a supplier to the market and possible replacement with alternative suppliers. Thus competition control operates in a similar manner to volume of business. In both cases the retention of the buyer's business provides an incentive for the supplier to act in the buyer's interests. Authority mechanisms Behavioural constraints and `legitimate' authority can be used as a control through the definition of certain àcceptable' bounds of behaviour and the imposition of specified penalties for non-compliance. The delineating of required behaviour through regulation and the possible vesting of authority


12

in specific organisational positions enable the imposition of penalties for noncompliance in the form of monetary penalties, suspensions and expulsion from the buyer's facilities. Socialisation mechanisms Control of suppliers is also achieved through the inculcation of norms and cultural values that are consistent with those of the buyer. This occurs through the use of socialisation mechanisms such as the informal information systems between buyer and supplier personnel, suppliers being on-site and the various inductions suppliers have to undergo.

CHAPTER

2

FIRM A: ALUMINIUM PRODUCTS

Firm A is one of eight business units in an Australian integrated aluminium products company and is the business unit responsible for producing, marketing and distributing aluminium rolled products. Firm A's manufacturing operation comprises various hot, warm and cold rolling mills, a remelt plant and an aluminium can recycling program. Its product range includes aluminium plate, coil, sheet, canstock, aluminium foil and processed scrap aluminium. Firm A has never been regarded as a significantly profitable business unit within the company group and has often recorded significant operating losses. This has now raised concerns about its future: the parent company had made public announcements of its intention to divest itself of downstream aluminium operations (Firm A and one other business unit) at the time of this study.

Background to developing strategic relationships Firm A's history of poor profitability and the obvious need to achieve performance improvements and cost reductions resulted in a number of business initiatives which, ultimately, led to the development of SSRs. One initiative was a re-evaluation by the parent company of its role in the aluminium rolling business. External consultants commissioned to investigate


14

opportunities for Firm A to become a profitable operation recommended that it needed to reduce personnel, reduce cycle-time and inventory levels, and increase equipment availability if the aluminium rolling operation was to become profitable. (Equipment breakdown at Firm A often halted the production process and was perceived as a `cause' of unprofitability. Increasing equipment availability was consequently focused upon as it measured the time equipment was actually available as a proportion of the time it should have been, after allowing for preventive maintenance.) In response, senior management at Firm A commenced a program known as the Business Improvement Project (BIP), leading it to become aware of the value to be gained in strengthening supplier linkages. For example, in an attempt to reduce cycle-time, the general manager of operations proposed that production scheduling be done on a daily, instead of the existing weekly, basis. Although the change reduced cycle-time, it also significantly increased set-up costs. To retain the improved cycle times but reduce the set-up costs, all replacement parts necessary for the set-up activity had to be readily available on the factory floor. This led to a focus on the processes of ordering, procuring and distributing materials from either the supplier or store-room to the shop-floor. Management thus became increasingly aware of the role suppliers could play in improvement processes and the achievement of the BIP objectives. Reflecting on the growing awareness of suppliers as a source of value, the manager of supply commented: We had a whole range of suppliers. We really didn't know how many suppliers we had. We had different activities and different processes running for each supplier. We had a very complex process at that stage. We looked at ways and means of simplifying everything bearing in mind that one of the drivers of this, [and] the main driver of the [BIP] business here for cost reduction, was cycle time.

If value was to be extracted from supplier linkages, Firm A had to first overcome problems in the way it dealt with suppliers, in particular the high level of complexity inherent in its traditional supplier practices. For example, in the case of internal transport, price minimisation had long been the guiding objective in supplier selection. This had, over time, resulted in Firm A dealing with approximately twenty different transport companies and up to 40 different courier companies regularly. More generally, the manager of supply commented on the complexity: We were looking at the number of suppliers that we had and we came across groups that had at least 3000 suppliers. We had a range of products in the store. Some of it hadn't moved for 20 years plus. We didn't know the state of the product. We got involved in saying we have got to make it simpler. Then we started saying one way of simplifying it is to reduce your number of suppliers.


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In addition to supplier rationalisation, Firm A changed the way it interacted with suppliers in attempting to create value. Supply department personnel changed the way they selected and dealt with suppliers. Traditionally, the supplier was chosen on the basis of price. This was been replaced with a focus on `total cost', which included all the explicit and implicit costs associated with suppliers. As the manager explained, this reliance on the `total cost' concept was a recognition of the supplier's wider role in the provision of products and services: Once these suppliers understand our business, we can say, `We can only have one supplier and it's going to be built very much around the total cost concept and your ability to work with us to lower our total costs. The total cost is very much price [plus] the quality of the product. It's your ability to work on improvement programs. It's your ability to get on with the people on site. It's your safety.'

A purchasing officer at Firm A commented further on the change in supplier relationships and the move to greater collaboration: My role has changed in that before it was adversarial, you would obtain three price quotes from suppliers and then select the supplier purely on lowest price. Nowadays you try and build relationships. You need to have a continuing relationship with a supplier, with a key thing being trust.

Initial reliance on trust Along with these changes, Firm A attempted to build trust in the initial stages of its SSRs. The two purchasing officers that interacted daily with suppliers viewed trust as an essential ingredient in supplier relationships and saw their role as adding value through the creation of trust, open communications and long-term relationships with suppliers. When asked what lessons he had learnt over his tenure, a purchasing officer commented: I think the most critical thing I have learnt is relationships. Relationships and trust. These are probably the two most critical things. The ability to trust and work with the supplier so that they can help you improve your business.

Firm A's documentation was consistent with this emphasis on trust. When selecting suppliers, for example, personnel were directed to examine each firm's trustworthiness, ethos, vision, goals, openness and capacity for open communications — all measures of the supplier's organisational culture. In addition, an evaluation of company stability was required, capturing the temporal consistency of the supplier and its organisational culture. These evaluation measures are consistent with Zucker's (1986) character-based trust, where characteristics provide a basis for predictions of future behaviour. At


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Firm A, the identification and evaluation of the supplier's `character' was used to form predictions about the future behaviour of the supplier. The firm attempted to use trust as a control through building mutually shared expectations about the role of each participant in the relationship. In the early stages of SSR development, accounting and contractual controls were rarely used. Contracts were absent in all SSRs. While agreements detailing the scope of the transfer of goods or services were in place, none were legally enforceable. According to the general manager of business analysis, trust made extensive contractual controls costly and less important: We never had in place any contractual arrangements. A lot of this is built around trust, trust being very much one of the core drivers. The only way we are going to be able to take a lot of costs out of our structure here is to be able to trust the supplier and get the supplier to do the work.

While Firm A seemed to prefer the use of trust mechanisms instead of accounting and contractual controls in the early stages of its SSRs, its choice was also driven by a lack of formal process measurement and documentation over time. This ìnformal' culture had left Firm A unable to determine process standards for performance measurement purposes and, while the management at Firm A had attempted to implement process measurement systems, a series of projects to measure and document processes proved unsuccessful. This lack of process measurement subsequently resulted in an inability to set àppropriate' standards of supplier performance and an inability to use formal controls. Firm A had attempted to circumvent this problem by allocating the performance measurement task to the supplier. For example, the hose maintenance supplier provided information listing all works-performed and their nature, and the cost of hose maintenance by department. Similarly, the crane maintenance supplier provided a report which detailed the maintenance costs by crane, the number and cost of breakdowns per crane, and the production hours lost. However, operations personnel and department managers involved with these suppliers rejected such information, expressing doubts over its accuracy. Reflecting on these problems, the general manager of business analysis commented: This is where we went a little bit too far. We simply turned around and said to the supplier, `You do all the measures'. We haven't got the resources. The guys in the operations areas said, `We haven't got people to sit down in front of terminals and put all the data in the systems and what have you'. Then, when the supplier started coming back with the measures they [the operations people] rejected them and said `No, that's not right'. They became protective of their own environment [and said] `That's far too critical of us. That's not right.' As such, the supplier, quite rightly, said, `What's the point of keeping the measures?'


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Other controls Volume of business In addition to character-based trust, Firm A relied on the volume of business control extensively. The identification of the relative volume of business formed an explicit part of the supplier selection methodology. Potential suppliers were required to be òf a size where Firm A will be an important customer' and the proportion of Firm A's business to the supplier's total business was usually estimated and documented either as an advantage or a disadvantage. The manager of supply explained how volume of business aligned incentives: When you are looking at supplier relationships in depth you really only want to look at those where there are opportunities to drive costs down. There are going to be opportunities in every relationship but you have got to have the commitment of the supplier as well as yourself. There has got to be business volume involved.

Authority over suppliers In direct contrast to notions of trust, behavioural constraints and `legitimate' authority were also used to control supplier behaviour. This was implemented through regulations which defined acceptable bounds of behaviour and penalties which were imposed on non-complying suppliers. These authority controls existed primarily for on-site suppliers. These ranged from a requirement that all suppliers' vehicles be parked in one area to the recent introduction of routine inspections of all supplier vehicles that entered the site. The implementation of this latter proposal provided Firm A with more authority to stringently monitor compliance with on-site regulations, thus making the authority control mechanism more effective. Socialisation of suppliers Control of suppliers was also attempted through more subtle forms, namely the inculcation of Firm A's cultural values and norms. There were several socialisation mechanisms (informal information systems, daily interactions between buyer and supplier personnel, and various mandatory safety and environmental supplier inductions), all of which were intended to result in the inculcation of Firm A's values and reduce the possibility that the supplier may engage in self-interested behaviour.

Initial benefits Some immediate benefits were realised by Firm A through the development of SSRs. Portfolio analysis methodology was used to identify those products


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and services where an SSR was appropriate. The first SSR created was with the internal transport supplier, because the contracts were approaching renewal and the activity of internal transport impacted throughout the plant. In terms of communicating and displaying the new policy of close relationships with few suppliers, internal transport seemed an obvious choice. As stated above, Firm A had up to 20 transport companies and 30-40 courier companies which delivered to the central storeroom. Firm employees requiring parts were required to travel to this central store and obtain the parts required. This process was perceived as problematic: many employees had been observed taking unscheduled `breaks' on the basis that they `needed parts'. By working with a single supplier, Firm A set up an internal transport facility whereby the supplier distributed materials from the storeroom directly to the end-user. Firm A was thus able to strengthen the controls over the inventory distribution process, and reduce the opportunity to shirk. The manager of supply explained: We had supplies coming in and the store taking the product and putting it in shelves and someone roaming around from out in the plant would spend half an hour in the canteen or half an hour talking to their mates and we would find that they weren't in their work place. They would be running over to the store for no other reason than a break. We got the guys to, when they wanted something, go to their own work station and order the product on the supply system and that would then go through to someone in the store. The storeman would then get it. He would go around and pick up whatever was required. He then would put it down into the loading bay. The guy from the supplier would come along and he would put all the product on the back of the truck and he would go around the site to designated areas and deliver it. That then cut out the need to have our people going across to the store, the storeman having to get everything and deliver it to the counter. We were able to drive down costs this way.

Firm A also developed an SSR with its supplier of bearings, with both parties agreeing that the supplier would take over all the bearing stores. This led to a number of benefits which the supply manager identified: Once we got that original relationship in place, the next step forward was to set up training programs and show our maintenance people how to properly maintain bearings that are actually in the mills themselves. When we have any major breakdowns we had to try to get the drawings together because when we have a major breakdown we really don't know what has gone wrong. So we need to then involve the supplier to say, `Potentially these bearings could be damaged'. When we get into the mill we really want to know what bearings are damaged so we can replace them. What the supplier would do is they would come out with all potential bearings that would be in that particular mill, depending on what our engineers had specified. They wouldn't charge us for those bearings unless we used them. So at the


19

end of the maintenance program they would come back and they would say, Òkay, 25 bearings were delivered. You only needed to use 10. We will take the other 15 back, put them back in stock, and we will only charge you for the 10 that you have used.' With those sorts of programs we were then able to drive our own costs down.

Firm A was also able to eliminate the activities and costs relating to storage of inventory through the development of an SSR with its inventory supplier. The company set up a process whereby the requisition officer of the materials would send a requisition to the supplier through electronically linked information systems. The supplier, by making a delivery in the morning and afternoon of each day, was able to guarantee delivery within 24 hours. The supplier also set up `Kanbans' containing low-cost high-consumption items in each operating area. When operations personnel required these items, they would simply obtain them from the Kanbans. The supplier would then, on a twice weekly basis, replenish these bins back to maximum levels, and charge Firm A for items used. These initiatives not only allowed Firm A to eliminate the store-room, they made redundant the costly and often obsolete mini-stores of inventory maintained throughout the site by personnel as `safety caches'. In addition to these benefits, the inventory supplier provided previously unavailable expertise and knowledge. According to the supply manager: We have got to the stage now where we have a representative from the supplier on site ... He is on site full time. He takes a lot of the work off our engineering guys because if our engineering guys are looking at a project they would then go and try to suss out who our supplier would be for that particular area. Now what they do is they give the supplier guy a ring. He goes over there and he manages that side of it for them. He then says, `This is what you want. I know who looks after the different types of valves, the different types of hydraulics, water pumps, what have you.' He looks after that side. He works in with our engineers and he sources all our suppliers and they supply the goods and what have you. Bearing in mind that a lot of our equipment on this site has been imported, with unique pieces of equipment or parts within that major unit, our purchasing officer would be getting phone calls and saying `Where am I going to get this from?' We imported this piece of equipment from Romania. But now that is all handled by this guy from our supplier.

Despite benefiting from developing SSRs, a perceived need for more formal controls emerged over time in the form of market competition, and accounting and contractual controls.

The need for formal controls The driving force behind the development of more formal controls involved process-based trust at Firm A. (Referring back to the discussion of Zucker (1986), process-based trust depends on previous and expected exchanges and


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transactions. Norms of reciprocity and behaviour emerge over time amongst a group of economic exchange participants and provide common expectations on which the exchange is founded. In the context of SSRs, the interactions between the supplier and buyer can either reinforce initial expectations and trust, or can differ significantly from initial expectations such that only a low level of trust results.) Over time, Firm A became increasingly aware that its expectations of many of its strategic suppliers were not being met. Instances of self-interested behaviour by suppliers subsequently resulted in a low level of process-based trust. Whilst initially perceived as successful, the transport supplier relationship was later found to be one which required formal controls. The contracts negotiation manager stated: With our transport company, we're aware of the fact that there really isn't much in the way of performance measures, performance data gathered, so we really don't know on a per tonne moved or per tonne truck mile or straight per tonne, we don't know what we're being charged for domestic freight versus what's available to competitors. There is anecdotal evidence from people involved in the freight operation that we shouldn't be getting charged `X' dollars for trucking one small computer here but it's difficult to react to individual incidents. Certainly there seems to be a feeling amongst the freight people that there was no way that we could benchmark the service against what else was available and maybe we were getting overcharged on a per tonne basis.

Other examples of supplier opportunism and self-interested behaviour were cited by the contracts negotiation manager: Another example is the cleaners [waste disposal services]. There's feedback that they're getting money for nothing. [They] come into the office early, sit down on the step outside and smoke cigarettes, come in, sweep the floor, run the mop over it, go home. For that, we pay them some hundreds of thousands of dollars a year for their cleaning service. That's another one that I'm concerned about. When you actually look at the service that you're getting, how clean is your desk in the morning or how clean the floor is in the morning and you notice that two days out of the seven days of the week it hasn't been cleaned, you're going to start to question. Oh, and engineering firms is another one. People look at the rates structure that we've set up with our major engineering supplier and they're basically saying that's double or not quite double but 50 per cent more than what I could get for it in the shop down the road.

As a result of the above, the general manager of business analysis acknowledged the need for formal controls alongside trust. He felt that a level of contract was needed to provide a framework within which the supplier was required to act. Also, the contracts negotiation manager, who dealt extensively


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with suppliers, indicated that formal controls were needed to support and coexist with trust mechanisms: They [the supplier] are in business, among other things, to make money; we're in business, among other things, to make money, and you need to have enough systems in place that if either party is getting more out of the relationship than what is reasonable, you should have enough data on him to come to that realisation.

These concerns led to the attempted implementation of both market competition and accounting and contractual controls at Firm A. These were sought through the `forklift maintenance project'.

Developing formal controls: the forklift project In response to the above concerns, the general managers of operations and business analysis selected the forklift maintenance project, which involved the creation of an SSR with a forklift maintenance supplier, as the first step towards standardised and formalised procedures for controlling suppliers. The contracts negotiation manager, who was selected as the project leader, explained that in addition to setting up a SSR, the forklift maintenance project was to be used to develop a generic performance-based service contract: My understanding of [my] job is to try and apply some of the systems thinking that would apply to all of our employees to the community of outside contractors who work with this company. Basically, what that means is that I am trying to look at how services are provided to us through all our various outside supplier contracts and set up better systems for controlling and looking for opportunities to either save money or improve the level of services. The way that I've been asked to start that is with this forkshop project — to basically get me up to speed on what some of the issues are with supplier management and hopefully to establish some standard processes and standards which can be applied to other contractors.

The contracts negotiation manager envisaged a model where all suppliers would report a set of generic performance indicators, including: cost performance the quality of the service provided safety performance environmental performance. All prospective forklift maintenance suppliers were told that: It is expected that the [selected] supplier will provide regular written reports on key performance measures of the contract. Some of the areas for reporting are: per unit and per runhour maintenance cost, run time between breakdowns, breakdown


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response time, availability of each unit, amount of rework on repairs, safety performance and environmental performance.

The contracts negotiation manager and purchasing officer developed a scheme of performance measurement which rewarded reductions in parts and labour usage as well as increased equipment availability. Below an àcceptable range' of parts and labour usage the supplier would receive a nominated rate plus a bonus percentage subject to specified levels of forklift availability being achieved. If the supplier exceeded the àcceptable range' the excess labour and parts were to be supplied at cost. Although the selected supplier, Supplier X, agreed to provide the stipulated performance measures, the standards against which performance measures would be evaluated proved contentious. In particular, the proposed standards for parts and labour usage attracted much debate. While accounting controls were proposed as a solution to process-based mistrust, Supplier X attempted to avoid the implementation of these accounting controls by arguing that it would lead to a lack of trust: Supplier X field service manager:

We pretty well know the world, know our competitors, but our price to you was at the right end.

Firm A purchasing officer:

So what profit do you make on your parts?

Supplier X field service manager:

A lot, not much. Sometimes zero percent, sometimes a hundred.

Supplier X general manager 1:

So you want to ... you want to look at our invoices?


Yeah, I think to build the relationship, you need to be able to say here are our costs and we need to be able to say well here are our costs.


A bit of history on where [Firm A purchasing officer] is coming from. A few years back we were doing audits on one of our suppliers and we found we were paying $1000 more on parts than if we were getting them ourselves.


Are we going to see your costs?


Well, you have to rely on our honesty a lot.


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Firm A was also not happy with Supplier X's quoted labour rate. However, the supplier representatives defended themselves on the basis that such a rate was necessary to cover their high level of performance. These events resulted in the contracts negotiation manager becoming concerned with the lack of direct knowledge about current process performance when implementing the performance measurement system. He felt unable to implement the desired accounting controls without accurate performance standards for evaluation purposes. Attempting to overcome this, the contracts negotiation manager and the purchasing officer implemented a performance monitoring system to measure the current forklift maintenance performance during negotiations with Supplier X. The contracts negotiation manager also wanted to complement these accounting controls with market competition controls. In relation to parts prices, the contracts negotiation manager proposed that the benchmark be derived from comparisons with other suppliers. Again the supplier attempted to highlight flaws in this proposal: Firm A contracts negotiation manager:

We want an independent benchmark on parts price and we have an independent suppliers' list price.


The problem is, we don't know what is included in that list price.

The suppliers continued to point out problems in the use of competition controls in the SSR relationship. They again identified technical flaws in the proposal and promoted trust mechanisms as an alternative control: Supplier X field service manager:

We want to revisit the benchmark on parts and labour, otherwise we'll step into a penalty rate through no fault of our own.

Firm A contracts negotiation manager: Parts bills in excess of $20 000 a month will be at cost.


Where did you get the $20 000 figure from?

Firm A contracts negotiation manager: Maybe you could do an audit, ring around and get prices for a basket of parts.


We don't want to make it or [Firm A] to make it where you have to monitor us all the time.


They'll quote you lower than cost because it's additional business.


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Despite this, the contracts negotiation manager was adamant about the use of market controls: I think we need to leave you with the impression that we will do an independent audit every few months by comparing prices to what we can get elsewhere.

The supplier representatives persisted in highlighting the uncertainty surrounding the use of accounting controls and repeatedly promoted trust mechanisms. They did not agree with the establishment of the performance measures and specific benchmarks proposed by Firm A and argued instead that they should be `trusted' with an open-ended and flexible agreement. However, the contracts negotiation manager was adamant that formal controls were required in light of the process-based mistrust that had emerged between Firm A and its other suppliers. When it seemed that Firm A was going to persevere in the implementation of accounting controls and contracts, the supplier attempted to clarify the extent of their accountabilities and responsibilities: Firm A contracts negotiation manager: With performance reporting, did we specify what we want in the report?


I think the closer we get [into the relationship], it [the performance measures] will get massaged into something perfect.


We can provide the measures we think you'd like but if you have specific measures you can tell us and we'd key them into our system.


Is it [performance measures] going to be final as a contract, or an agreement?

Firm A contracts negotiation manager: What's the difference? Firm A supply manager:

In the past we've gone with the latter, but indications we are getting now is that we put it in the contract.


If we want to change it [in the future] do we have to go through the whole legal process again?

Firm A supply manager:

I would think there would be supporting schedules.


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A number of meetings between Firm A and Supplier X were held but consensus on appropriate benchmarks for the accounting controls was not achieved. The major factor preventing agreement was the lack of information and measurement of the processes involved in forklift maintenance at Firm A. It was consequently stipulated in the draft contract that performance measurement targets were to be left open. These were subject to revision depending on the actual results observed over an initial three to four month period. Accounting controls were thus included in the contract.

CHAPTER

3

FIRM B: STEEL SUPPLIER

The second organisation, Firm B, is one of several divisions that comprise an Australian manufacturer of steel products. Firm B's major product lines are steel, tinplate and steel strapping. A variety of by-products are also sold. Firm B is the largest division within the company and is a significant profit maker. The profit level is such that employees within Firm B regard themselves as subsidising other less profitable divisions within the company. The origins of SSRs at Firm B, like those at Firm A, lie in initiatives to improve performance. As a result of the dampened market for steel in the early 1980s, external consultants were commissioned to identify opportunities for cost reduction and performance improvement. They identified the supply chain as a potential source of value and the supply department as an area where operating costs could be reduced and performance improved. The supply manager for materials expanded further: Also, at that time, the '83, '85, '87 period, the company was going through quite a restructure. Back in '83, the bottom fell out of steel. You know, we were in the red, operating at a loss. The focus was on cost savings and one of the areas that was largely untapped was the incoming goods, so again there needed to be something done and it was seen that having the supply function will drive the inventories and provide a cohesive approach for the company.


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From their analysis, the consultants recommended that the previously decentralised supply function be consolidated and emphasised `significant but fewer contractors' and `strategic purchasing with more systematic contracting processes'. As a result, the creation of SSRs and improvements in the supplier management processes were given high priority at Firm B. Reflecting on this, the supply manager for materials commented: Since 1987, we got involved with the partnering concept. We now call it àlliances', I guess but in those days we called it `partnering'. We were very active and I was very active in outsourcing most of our consumables and up until about ... early 1992, I guess, we had a general store that carried about $4 million of consumable inventory. We also had a bearings store that carried inventory and I was very active and involved in outsourcing that [consumables and bearings] inventory to our suppliers.

According to the manager of supply, the supplier in the SSR had to fulfil a bigger role at Firm B in comparison to before: The contractor must save us money, must reduce costs as well, must be in technology and must be someone that gets on with our union (not one that disrupts the place) and the [last] requirement is [the contractor] must be someone who likes to be seen to be getting business.

Like their counterparts at Firm A, supply department personnel at Firm B felt that the way they handled suppliers changed significantly with the creation of SSRs. One material supply contract officer compared SSR management to traditional supply management at Firm B: When I first started, we used to send out a tender and go through each line on it and pick the cheapest price from a couple of hundred different suppliers. One supplier's doing all that for us now and we're getting other benefits. Previously, suppliers would just supply and not necessarily on time. They just sent it when they had it. So there's been some big changes. We certainly didn't have the relationships with suppliers before.

Similarly, one of the major changes with SSRs was the greater collaboration between Firm B and its suppliers: When I first started in purchasing, it was Òh, well, we're Firm B and you'll do what we say'. In the old days we'd tell them what we wanted and we were very rigid with that. Now, we're actually going to them and saying, `Hey, this is the application we've got, what do you recommend?' so we're actually trying to get them involved more in our own processes and actually using their expertise.

Consistent with observations at Firm A, Firm B used portfolio analysis in developing SSRs. Most of Firm B's supplier relationships were with local metal industry companies involved in the transportation and processing of metal ores, steel and scrap metal.


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Trust and formal controls Trust as a control featured prominently at Firm B. Like their counterparts at Firm A, Firm B purchasing officers considered trust pivotal in the establishment of open communications and long-term relationships with suppliers, and often relied upon mutually shared expectations about the role of the supplier. One purchasing officer in materials supply explained the key role that trust played: Trust has got to be both ways. We've got suppliers that tell us how much they buy it for and how much their mark-up is and they put all those figures on the table. When we come down to evaluate them for a price review, they actually come with prices they've got from their suppliers and say, `Now, this is the mark-up we want to make' and we'll say, ÒK, we'll go through it'. They come to the table with all their costs. So that trust is coming from both sides we say to them, ÒK, this is what we're trying to achieve. We know we've got faults. 'We lay all our cards on the table.

Character-based mechanisms such as an evaluation of the characteristics and culture of all potential suppliers were utilised as part of the formalised supply methodology at Firm B. For example, process documentation in the supply department required that: ... an evaluation shall be made of the [potential] supplier's capability to manufacture or supply the goods or services to specification. This could involve: review of past quality and/or service; study of contracts of comparable size and complexity; published information on the supplier; a review of the supplier's facilities.

These characteristics provided a basis for forming mutually shared expectations about the role of the supplier and enabled the use of characterbased trust. According to one purchasing officer, the use of character-based trust was effective at Firm B: You've got to be very careful with the suppliers you select. We've been quite good so far; we haven't had a supplier that's taken advantage of us, if you like. That's why we go through that program of going out, meeting our suppliers, investigating them as far as their finances, as far as other customers they deal with and really getting as much background information as we can.

Despite the perceived effectiveness of character-based trust, Firm B also used accounting and contractual controls in some areas of supply. The materials supply department was the main department where both trust and formal controls were used. Contracts, although in place, were not used extensively as they only identified the nature of the exchange. In contrast, accounting controls such as performance measures were continuously monitored and discussed at monthly meetings between material supply and


29

its suppliers. The materials supply manager commented on the importance of accounting controls: How can you manage anything if you can't measure it? You have got to measure to manage. You can't sit with a supplier and talk intelligently and comment unless you have a performance measure. You need data and statistics regardless of what you do. There is no point in having a meeting with a supplier and having all these nice warm and fuzzies [without the data and statistics].

These accounting controls were introduced in response to dissatisfaction with suppliers. Explaining this, the material supply manager commented: So, what we had to do from 1987 onwards is make our suppliers more accountable so that when they had a contract with us they valued that contract and they performed according to the contract. That was always lacking up until then. So, when we started looking at how we could do this, we started putting conditions on them to supply within 24 hours, because what was happening was that our customers in the plant were saying, 'It's taking us three weeks to get something through supply. I can hop into a car and go into town and pick this thing up in half an hour. Why can't you guys provide the same service?'

Other controls In addition to using trust and accounting and contractual controls, Firm B also attempted to manage its SSRs through other forms of control. Market controls: volume of business The volume of business with suppliers is one control extensively relied upon at Firm B. A significant proportion of the firm's external suppliers are small localised businesses, and a number of these have their main offices on-site at Firm B. These suppliers are highly dependent on Firm B's business and the possibility of losing this revenue is a significant incentive for the supplier to refrain from self-interested behaviour. The volume of business control is considered to be highly effective. The manager of supply stated: We are a bit fortunate in the fact that we are a big fish in a small pond and people like doing business with us. We don't have a lot of problems with a lot of smaller companies. Most people usually think about tomorrow.

The effectiveness of control through the volume of business is such that other controls are often viewed by some as unnecessary. In the engineering contracts department, for example, there are 'retention' clauses in supplier contracts which require that a percentage of the payment to the supplier be retained by Firm B for a period of up to one year. These funds are then


30

distributed to the supplier if the work performed remains satisfactory. According to a contracts administration officer, the effectiveness of the volume of business control made the retention clauses redundant: For a lot of companies, this [business with Firm B] is their bread and butter. A lot of their work is generated from here. They'd be stupid to cut corners, they'd lose business. A lot of them have their offices and warehouses on this site, that's the amount of work they do for us. They won't jeopardise their business with us, that's why the smaller [supplier] retentions are totally stupid. They won't risk losing the business.

Market controls: competition Unlike Firm A, Firm B has used market competition controls from the early stages of its SSRs. Rather than entering into long-term contracts with its SSRs, Firm B uses a series of short-term contracts which are then rolled-over. Before a contract is rolled-over, the performance of the supplier is compared to the marketplace and alternative suppliers, with changes to better suppliers not uncommon. This indicates the use of the competition control. Comments of the supply manager confirmed this: We always have clauses in our contracts that we can change them. Basically we didn't have what we call long-term contracts, contracts any more than a year. One year or 15 years, these days if we get in bed with a contractor and a good contractor we will want to roll that contract over but we will always at some point in time go back to the market place just to see.

Authority over suppliers Firm B also used authority mechanisms as another means of control. These mechanisms operated in a similar manner to those at Firm A, defining àcceptable' bounds of behaviour and identifying penalties for non-compliance. SSR contracts also contain a number of clauses which provide Firm B employees with the authority to require background information on any supplier employees, the right to prohibit the entry of any supplier employees to the Firm B site, and the right of inspection of contractor's sheds, tool boxes and vehicles. Suppliers are also required to strictly abide by the vehicular traffic regulations and enforcement regime in place. In addition, specific levels of authority are vested in particular organisational positions. For each strategic supplier, the authority to handle any queries of a technical or on-going nature and ensure the smooth running of the contract on an operational basis is vested in a daily contact. The authority to


31

request performance information from the supplier, ensure that the performance of the supplier is reviewed regularly, and take any actions deemed necessary in the management of the supplier is similarly vested in a contract owner. The vesting of detailed supplier management authorities in specific organisational positions reinforces the authority control in Firm B's SSRs. Socialisation mechanisms Similar to Firm A, socialisation mechanisms are also used by Firm B in an attempt to control suppliers. For example, suppliers are required to undergo three inductions. The first is an induction into the organisation, the second is an induction at the department level and the third is an induction at the specific job level. These induction programs, coupled with informal information systems and the daily interactions between buyer and supplier personnel, are mechanisms by which Firm B attempts to control supplier behaviour. These mechanisms are intended to inculcate the supplier with a culture and philosophy similar to that of Firm B's own employees which, if successful, strengthens the possibility that the supplier will act in the interests of Firm B.

Benefits of strategic relationships Again similar to Firm A, a number of benefits resulted from the development of SSRs at Firm B. According to an engineering contracts manager, the SSRs entered into were beneficial because they eliminated the need to re-tender and enhanced learning effects, efficiency and Firm B's familiarity with its suppliers: Our aim is to move to long term contracts, to move away from repetitive lump sums and also to move away from hourly hire work. We are trying to move to long term arrangements where the contractor takes more ownership of the job he is doing. That's the trend. The philosophy is to do away with all the inefficiencies of retendering each job each time it occurs. If you have a repetitive type of work, rather than tender it each time the job comes up, you put a long term arrangement which may go for three to five years ... You do the work once and then the contractor just does the work for the same money each time it recurs. That's the direct financial side. The other side is that the contractor gains experience and knowledge because you have the same guy and the same crew doing the work all the time. There are efficiencies that come back in from that which should ... give you financial benefits and maybe improvements in plant down-time.

Numerous examples of SSRs yielding benefits existed throughout Firm B. One such example related to the maintenance of cradle casters (containers for molten iron ore). The creation of a SSR for the maintenance of cradle casters


32

was perceived as providing performance gains through the superior knowledge of the supplier and the motivation of the supplier in comparison to in-house departments. The contract superintendent in charge of this SSR expanded: You can't put a performance-based service contract in place with internal supply, internal to the company, because it would not wear. The maintenance is not their core business but to the external supplier the maintenance is. With internal, they wouldn't care two ticks about the KPIs because they know that next week they'll get other jobs [maintenance of other Firm B facilities and equipment].

Software support provided another example of SSR benefits. This relationship offered savings in labour costs and greater discipline over Firm B's employees. One employee involved in the provision of the software support service had been engaging in self-interested behaviour, using the excuse of èmergency' software support and `systems failure' to charge excessive amounts of unapproved overtime and to access unauthorised business systems. The business systems superintendent in charge of the software support SSR complained: If I was an external company he would be fired. He would be gone. But being Firm B we don't do that, we move him around. Within the new SSR arrangement his access will be limited. There will be a statement that says `Systems administrators will not touch code' and that's great. That's why we have gone to an external supplier.

By developing a SSR, adequate knowledge and expertise was gained which enabled recalcitrant employees to be controlled.

Redesigning the contract process As a result of the recommendations made by consultants for more systematic contracting, Firm B gradually started to formalise its supplier management process by embarking on a process labelled `contracting process redesign' (CPR). An engineering contracts superintendent explained the CPR exercise and why Firm B was seeking more formal controls in the management of its SSRs: At the start [prior to the consultants' report] contracting was very ad hoc. There was no strategy, you know, for doing anything. The consultants' report really showed something that we were missing in the contracting process and tried to address that in a proper manner. That exercise took five months and there was a recommendation made to management to build on the strategic element. [For example] to set up the contracts for, say, the maintenance departments and the process service contracts.


33

As part of the CPR process, supply officers examined supplier relationships, developing contracts where absent. Performance measurement systems or key performance indicator (KPI) reporting were developed and clauses inserted into contracts which required regular meetings with suppliers to discuss and review the supplier's performance. In the raw material supply area, for example, a contract and a corresponding supply agreement was developed for each supplier. Contracts had not existed previously in this area, with suppliers having tender documentation only. The new contracts included controls such as disincentives for delivery outside specifications, while the supply agreements contained the performance reporting requirements and accounting controls. Although the business analyst in this department was unaware of the specifics of the CPR project, he was aware of the need for formal controls: Ìt was perceived that there was something lacking, a failing in the department that we haven't formalised our relationships.' While formal controls were implemented in the areas of Supply which lacked such measures, the material supply area remained largely unaffected by the CPR process. The first SSRs were created in this department and, consequently, material supply had the most exposure to issues of control in SSRs. Having gone through the phase of dissatisfaction with suppliers as outlined earlier, the department had already developed the most formalised supplier management process. All supply relationships were governed by contracts which contain detailed contractual requirements and specify KPI reporting and accounting controls. Typical KPIs included delivery performance, returns, rejects and savings. Regular performance review meetings were also required and conducted. Formalised processes also support and complement the accounting controls specified in the contract. With the savings performance indicator, for example, there is a target of achieving 10 per cent reductions in costs over a specified period of time. Further, the requirement to achieve savings is included as a clause in the contractual documentation. As a contracts officer explained, formal processes existed for monitoring this cost saving KPI: The idea of the [savings] form is that they come up with an idea, saying ÒK, you utilise this valve. It may cost you an extra $10 but it's going to last you twice as long.' So, they'll put that down to the people on our site and they say, `Yeah, OK, we'll sign off but we want to study it further'. But any further study, they'll come to me, we'll work out from our usages how much we reckon the saving is and record that saving. Then what they have is like an action plan and that's what you get hit with if they don't achieve the results. So, with the study, you would record, ÒK, what steps along the way are we going to keep to achieve these savings?' and


34

that's where you'd make the KPI involvement and you'll put that in at the end of the period and you'll say, Èveryone agrees we've achieved that saving' and they get the credit for the saving and the graph goes up a little bit towards the savings target.

The CPR project thus resulted in the refinement and greater use of both accounting and contractual controls throughout the supply department except for material supply, which had been on the `SSR learning curve' the longest and had already developed a formalised supplier methodology comprising accounting and contractual controls. In fact, the material supply area exemplified the formalised supplier management process desired at Firm B, with `soft' notions such as superior knowledge being objectively measured through methodical cost saving measurement systems.

CONCLUSION

It remains to reflect on our initial discussion of the nature of strategic supplier relationships and the control framework that underpins them, and lessons from the two detailed case studies, to discover what insights can be gained from our analysis of controls in strategic supplier relationships. We attempted initially to clarify the nature of contemporary firm-supplier relationships by reference to emergent collaborative organisational forms. Our discussion contrasted the characteristics of SSR forms with market contracting and vertical integration. Here we noted the essentially cooperative nature of SSRs where participants seek mutual benefits based on reciprocal dependencies over the longer term. Further, we justified the term `strategy' in SSRs by locating the broad choice of SSR in a firm's strategic supply portfolio. We noted that, since SSRs require significant organisational resources, only strategically critical inputs are normally considered. Strategically critical factors considered by Firms A and B included the value of the good or service, measured by the annual spend, and the level of market criticality or risk associated with their procurement. In this way both firms used a form of portfolio analysis to ensure that the selection and development of these relationships were strategically focused. The choice of good or service around which a collaborative supply relationship is to be developed, therefore, should be located within a coherent and well understood procurement strategy. The case studies also illustrate that much needed impetus can be gained from aligning the choice of particular supply partnerships with specific firmwide critical success factors. This is important especially in the early stages of a strategic supply program. Firm A, for example, focused on the development of collaborative relationships with respect to the supply of machine bearings and maintenance. Both these relationships targeted Firm A's critical cycle time reduction program through the improvement of equipment availability. Outsourcing the complex maintenance activity, for example, had the effect of simplifying the firm's processes in order to focus on other core activities. To reinforce this strategy, Firm A focused negotiation with maintenance contractors on outcome measures and targets rather than the maintenance processes themselves. These negotiations proved difficult, however, since the pre-contract condition of the machinery could not easily be established or agreed upon. Despite these difficulties, the continuing negotiations had the desired effect of increasing machine availability. The bearings contract, by contrast, delivered major benefits to Firm A along these lines and was held up as a timely success story. We also outlined the many potential benefits associated with the implementation of such supply chain strategies. To support these claims, we reviewed published surveys, which found that many firms had benefited from the development of SSRs including improved profits. While considering


36

themselves to be in the early phases of developing a network of SSRs, the two case studies highlighted significant benefits. These benefits ranged from lower inventory levels to significantly shorter lead times, significant reductions in total costs, removal of non-value added activities and the utilisation of supplier expertise in the redesign/removal of work processes. More fundamentally, this also involved changing processes to accommodate particular SSRs and streamlining product or service delivery. Firm A's new internal transport and delivery system was a good illustration of this. We went on to note, however, that there were significant costs associated with SSRs stemming from the more elaborate supplier selection process required and the need to monitor and control such relationships. The two case studies, for example, highlighted the costs associated with implementing a more sophisticated selection process, the potentially protracted negotiations that are required once a supplier is selected and the on-going monitoring and management of the relationship. In particular, formal controls are costly and both cases illustrated the importance of good systems. It is important to recognise, therefore, that while significant long-term benefits may accrue from the development of SSRs, these may be accompanied by substantial hidden costs. Having considered the costs associated with formal controls and highlighted the importance of good systems, we then turned to a more detailed explication of the nature of such control mechanisms through, firstly, a review of the control literature and, secondly, the analysis of two actual case studies. Our ensuing analysis of the control mix in the development of SSRs constitutes an important contribution to the literature on supply chain management. The literature on supply chain management focuses predominantly on the use of trust mechanisms in the control of SSRs. We recognised that an important element in this framework was the notion of trust. The mutually dependent nature of the relationship between exchange partners in SSRs implies that some form of trust is critical to its on-going success. For the purposes of our exposition, we defined trust as: a particular level of the subjective likelihood with which a party assesses that another party will perform a particular action, both before he/she can monitor such action (or independently of his/her capacity to be able to monitor it) and in a context in which it affects his/her own action. Three sources of trust were identified. The first, process-based trust, relates to norms of reciprocity promoted by repeated interactions between exchange participants. By relying on ascribed background characteristics such as experience and technical competence, the second source, character-based trust, provides a basis for predictions of how exchange participants will behave in specific situations. Here the critical nature of the initial supplier selection process in assessing character-based trust was highlighted. The third source, institution-based trust, is embedded

CONCLUSION

37

in wider institutional structures and practices that are less related to the particular exchange and exchange participants. Since these background institutional expectations are common to all organisational forms and relatively unaffected by the specifics of the particular exchange, we argued that the first two sources of trust are most relevant to an analysis of SSRs. While issues associated with the development of trust were important considerations for exchange participants seeking a successful relationship in both case studies, we found that the firms still needed to engage in more conventional forms of control in addition to trust. Both firms attempted to implement formal controls while retaining embedded systems which focused on maximising character-based trust in the supplier selection stages of the SSR. Furthermore, Firm A sought to implement formal controls previously absent in order to promote process-based trust while Firm B embarked on a program to refine existing formal controls and implement them where absent, despite perceptions of moderate to high levels of trust with suppliers. Although based on a detailed study of two organisations only, the above findings are nevertheless inconsistent with the existing preoccupation with trust in the literature on supply chain management, and the perception of SSRs as primarily collaborative. Rather than trust conflicting with formal controls, both case studies point towards a co-existence of these controls in the management of SSRs. The need for formal controls to co-exist with trust is particularly so, given the potential pitfalls associated with an overemphasis on trust in such relationships. These drawbacks include an inability to impose sanctions on non-performing exchange partners and, indeed, an inability to specify that which should constitute `good' performance. Misplaced trust, we argued, also carries with it the risk of supplier opportunism where, for example, a supplier diffuses competitively sensitive knowledge to its other customers in the firm's industry. In these circumstances, finding the appropriate mix of controls for any given exchange relationship is critical. The development of a framework for evaluating the mix of controls apparent in SSRs was the first step in our analysis. We divided typical supply chain controls into broad categories. Accounting and contractual controls was the first such category. They entail performance measurement and monitoring strategies as well as the development of various forms of legally binding clauses and provisions in a formal supply contract. The second related to market-based volume of business and competition controls. These types of controls seek to reduce the likelihood of selfinterested behaviour on the part of the supplier by emphasising the importance of the buyer's business to the supplier and/or the possibility that they may be replaced by alternative suppliers in a competitive market. A third control stemmed from authority, which involved the articulation


38

of àcceptable' bounds of behaviour together with associated penalties for non-compliance, while the fourth related to supplier socialisation through, for example, on-site induction programs and shared information systems. These broad types of control together with character-based and process-based sources of trust provided a control mix framework from which the case studies could be analysed. Table 5 provides a summary of how the mix of controls was utilised at the two firms with respect to their SSRs. A number of more specific conclusions, however, may be drawn from the two manufacturing companies featured in the detailed case studies. The first conclusion is that inadequate measurement systems can greatly hinder SSR success. This was well illustrated by the experience of Firm A which had a history of poor internal systems. In some cases, this led Firm A to rely on suppliers to self-report on their performance. With at least one such SSR (the hose maintenance supplier), an environment of mistrust ensued where Firm A staff openly disputed the supplier's self-reported measures. A lesson here seems to be that good systems are needed to promote trust in exchange relationships. A corollary to this is that supplier performance measurement systems need to be jointly developed to maximise their credibility and to stabilise the on-going relationship. Our second conclusion is that finding the appropriate mix of controls is a critical task in fully realising the potential benefits for each specific SSR. Here it is important to acknowledge that trust in such relationships cannot be developed independently of other controls mechanisms. Rather, a balance of controls is required to ensure that trust can develop with the particular control mix being tailored to the needs of each specific SSR. As illustrated above, for example, the development of trust often turns on the availability of credible measurement and accounting systems. In this way, reliable systems form the basis from which process-based trust can be nurtured and the relationship can develop. Finally, careful consideration is needed with respect to the consistent application of control principles when forming SSRs. This was well illustrated by the protracted negotiations between the parties to the Firm A forklift maintenance contract. During these exchanges, it was apparent that Firm A negotiators were sending mixed signals about the role of trust in the developing relationship. While the supply manager espoused the need for trust, the contracts manager insisted upon strict monitoring of the relationship, comparing the supplier and its competitors. While this was at least partly as a consequence of Firm A moving to a new contract-oriented supply strategy, the point remains that this transition needs to be carefully implemented.

CONCLUSION

39

Table 5 The mix of controls used at Firm A and Firm B Control

Firm A

Firm B

Character-based trust

Initially central at Firm A. Evaluations of supplier characteristics were carried out and the `fit of culture' with all potential suppliers assessed.

Initially central at Firm B. Evaluations of the characteristics and culture of potential suppliers were required in the supplier selection process.

Process-based trust

A low level of process-based trust emerged at Firm A. Over time, a history of supplier opportunism resulted in Firm A's expectations not being met. Firm A has thus been unable to rely on processbased trust as a control.

Little supplier opportunism has been experienced at Firm B. This has reinforced expectations that the supplier will refrain from opportunistic behaviour and has enabled the emergence and use of process-based trust as a control.

Accounting controls

Initially absent at Firm A. The `forklift maintenance project' was aimed at implementing accounting controls through the piloting of a performance-based service contract. This was to extend to all SSRs.

Co-existed with trust mechanisms, but only in the materials supply department. Performance measures were routinely monitored and discussed at meetings with suppliers. The recent contract process redesign project has seen the refinement and further formalisation of performance measurement systems and KPI reporting.

Contracts

Absent initially at Firm A. The `forklift maintenance project' was viewed as enabling the implementation of contracts in all SSRs.

Initially present at Firm B in some supply departments, but fulfilled a background role only. The recent contract process re-design initiative has seen the implementation of contracts, where absent, and a greater reliance on contractual control.

Market control: volume of business

Used extensively at Firm A. The identification, use and evaluation of the effectiveness of this control formed part of the formal supplier methodology.

Used extensively at Firm B. This control is a key part of the formal supplier methodology. It is perceived as being highly effective such that certain other controls are viewed redundant. In addition, actions have been taken to make this control more effective.


40

Table 5 The mix of controls used at Firm A and Firm B (continued) Control

Firm A

Firm B

Market control: competition

Initially absent at Firm A. The contracts manager started to create situations where alternative suppliers were referred to for performance evaluation and negotiation purposes.

Has been utilised at Firm B. The use of short-term contracts provides Firm B with the ability to compare the supplier's performance with that of alternative suppliers, refer to the marketplace for `better' suppliers, and change suppliers.

Authority mechanisms

Authority mechanisms are in place at Firm A. Exist mainly for on-site suppliers through the regulation of behaviour.

Authority mechanisms have been in place at Firm B. Contractual clauses provide Firm B with certain `rights' over its suppliers and vest the authority for specific actions in particular organisational employees.

Socialisation mechanisms

Socialisation mechanisms have been in place at Firm A, and on-site suppliers are required to undergo these socialisation mechanisms.

Socialisation mechanisms have been in place at Firm B and on-site suppliers are required to undergo these socialisation mechanisms.

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