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1. Introduction
Suppliers of large organizations are increasingly invited by their clients to
participate in supplier development programs. The program aims at
continuously improving the clients supply chain by enhancing the suppliers
performance (Krause et al. 1998). Supplier development is defined as a
customers action to expand the supplier's ability to meet their procurement
requirements (Handfield et al. 2000). Because of supplier base consolidation,
suppliers are confronted with three options: becoming a preferred supplier by
accepting to participate in such programs, accepting a smaller share of
customers spending (Ulaga & Eggert 2006), or not being a supplier at all.
This participation can take many forms: enhancing technical capabilities,
quality, delivery or cost performance (Hahn et al. 1990). From the buyers
perspective, these activities can consist of evaluating the performance of the
supplier, training their employees or even investing capital in the suppliers
assets (Krause & Ellram 1997).
Supplier development is important because it is reserved for the best
suppliers, who in turn will receive a larger share of customer spending
(Dorsch et al. 1998).When the supplier does not receive a larger share of
customer spending, it is sometimes asked to improve the clients supply chain
with unspecified benefits (Boeck et al. 2009). Nagati & Rebolledo (2013) have
found that supplier development programs (SDP) generate benefits for the
supplier, such as lower costs and higher quality, but that the risk in
Dr. Harold Boeck, Marketing department, UQAM's School of Management (ESG UQAM),
Canada, e-mail : boeck.harold@uqam.ca
whether the benefits of the investments will favour the customer or the
supplier is also a risk factor (Weitz & Jap, 1995).
2.3. Financial risks
A supplier participating in a SDP will incur costs in many different ways. First,
the program can be disguised as a price negotiation tactic (Spekman &
Carraway 2006). Then, if the supplier does not possess the necessary
financial skills to comprehend the costs of the program, the customer could
exploit them (Anderson & Narus 2003) and the costs would be significant
(Reinartz & Kumar 2003). Participating in a SDP is not optional and the
pressure to participate can sometimes be substantial (Ulaga & Eggert 2006;
Boeck et al. 2006). All these additional costs represent another form of risk.
This is why De Toni & Nassimbeni (2000) emphasize the importance of
incentives to support the investments needed by the supplier participating in
such programs.
2.4. Strategic risk
Because SDPs involve sharing sensitive and strategic information (Handfield
et al. 2000), which increases the supplier vulnerability (Nagati & Rebolledo
2013), the supplier might lose a competitive advantage, should a disloyal
customer display any kind of active or passive opportunism (Enkel et al. 2005;
Wathne & Heide 2000). Information sharing, is essential because the more
strategic information the supplier shares, the more trust the buyer will give
them (Doney & Cannon 1997). Reducing the knowledge transfer can reduce
the potential benefit of that transfer (MacDuffie & Helper 1997) and the
absence of information can even increase uncertainty (Ritchie & Brindley
2007). However, if a customer displays opportunism by sharing some of the
suppliers strategic knowledge for its own benefit, it can spread through the
customers network, which includes some of the suppliers competitors (Dyer
& Hatch 2006). The disclosure of information, such as internal cost data
(Ulaga & Eggert 2006), can be major sources of conflict (Pfeffer & Salancik,
2003), which in themselves can be very risky for the supplier.
2.5. The ultimate risk: losing the customer
The ultimate risk is to lose a customer, unless that specific customer has no
value to the supplier. There are three factors which could trigger a relationship
dissolution: the supplier could decide not to participate in the development
program, which would limit its role to being a back-up supplier (Ulaga &
Eggert 2006) or even make it lose the customers entire sales volume (Boeck
et al. 2009); the supplier could participate, but their resources may prove to be
inadequate to meet the customers expectations; or, since higher involvement
creates higher potential for conflict emergence (Gadde & Snehota 2000), the
development program could become a source of conflict.
4.4. Negotiation
According to Handfield et al. (2000), the supplier who lacks the resources to
participate in a SDP can negotiate with their customer and select only a few
high-impact projects necessitating fewer resources, to start with. They could
also negotiate with their customer to share some of their resources, personnel
or training capabilities. The SDP could also be executed in small increments,
as is done for complex projects (Cucchiella & Gastaldi 2006).
4.5. Sales representative and executive involvement
The question of risk management is also one of who is responsible for
managing risk (Homburg et al. 2000). Upper management needs to
understand how the benefits of participation will outweigh the risks. Suppliers
top management involvement has been identified as an important, if not the
most critical, factor of success of a supplier development program (Hartley &
Choi 1996).
Supplier evaluation is an important means of communicating expectations and
is significant to a successful SDP (Watts & Hahn 1993). The supplier reduces
their risks by always knowing where they stand in regards to performance,
giving them the possibility to make adjustments (Prahinski & Benton 2004).
Because the sales representatives nurture communications between all
parties (Haas et al. 2012), they should play an active role in discussions
surrounding the participation in SDP.
The supplier is then better equipped to make the decision to participate or not
in a SDP. If they are satisfied with the risk analysis done upstream, they can
move forward and participate in the SDP. If not, they can opt out because the
risk of participating is greater than the risk of losing the customer altogether.
6. Conclusion
As was detailed in the above sections, risk is inherent to participation in a
SDP, but the identified risks can be assessed and mitigated by the supplier
wanting to take advantage of the benefits associated with its participation.
This paper offers a four step process to manage the risks associated with the
participation in a SDP. In the identification step, 5 different categories of risks
are presented. Four factors that contribute to the increase or reduction of the
probability or the significance of those risks are then presented as well as 5
means proposed to reduce those risks. Once the supplier decides whether
they will participate or not, a fourth step is recommended, which consists of
ongoing monitoring of the environment and the status of the relationships, in
order to detect any changes in the nature of the risks.
Participating in a SDP generates important benefits for the supplier if it
manages the risks inherent to this participation. The question is not
necessarily on risk reduction per se, but rather on expanding the gap between
the risks and the benefits. Organizations will accept a greater risk if the
reward potential is greater. Ultimately, the decision will be made by the
supplier and buyer by weighing the ex-ante perceived risks and benefits
(Ritchie & Brindley 2007; Jap 1999).
The next step in the development of this model would be to conduct empirical
research on this topic. Because it would be the first empirical research on the
risks incurred by the supplier participating in a development program, it would
be logical to start with exploratory research, such as a case study research
(Yin 2014) ,with a priori specification of constructs (Eisenhardt, 1989, p.534).
Acknowledgement
This research was supported by the Fonds de recherche du Qubec - Socit
et culture.
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