Industrial marketing relationships and open-to-tender contracts

Co-operation or competition?
Bill Donaldson
Introduction Academics and practitioners have given increased attention to the nature of buyer-seller relationships in industrial marketing exchange. This attention has been characterized by a movement away from seller-initiated effort, focused on manipulating the elements of the marketing mix in a prescribed fashion, to one of increased understanding of exchange processes where the buyer is more proactive and exchange is based on the joint efforts of different parties in the supply chain. The reasons for this new perspective are varied, but must include the adoption of total quality management (TQM), the need for cost reduction in finished goods to remain price competitive in world markets and the increased rate of innovation not only in products but processes and systems. These innovations include just-in-time manufacturing (JIT), computer-aided design (CAD) and information technology (IT). More complex supply chains, the relative increased costs of labour and the global market economy contribute positively to the need for more efficient exchange systems between firms. Evidence of these changes are most apparent in the motor industry, in electronics, and in other industries where there is a complex end-product of different raw materials, many components and a number of players in the supply chain. These industries are characterized by collaboration rather than confrontation, by joint involvement of participants rather than unilateral action, by interdependence rather than independence. In some cases, the positive results achieved have been persuasive in companies adopting this new relationship-based approach. Mercedes Benz, for example, claim to have saved $588 million by closer partnering agreements with suppliers (Waller, 1994). Sun Microsystems claims to spend 55 per cent of every revenue dollar on supplies and attributes its growth and above average-performance to its closer ties with suppliers, including vendor appraisal (Wheatley, 1994). This current study examines the nature of relationships between buyers and suppliers in the electronics industry. This industry is one which has embraced innovation, adopted TQM, has complex supply-chain management, yet, because of the global nature of the competition, faces constant pressure on costs
The author gratefully acknowledges the contribution of Eric Wilson in conducting interviews for this project.

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Journal of Marketing Practice: Applied Marketing Science, Vol. 2 No. 2, 1996, pp. 23-34. MCB University Press, 1355-2538

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and margins. There is thus a paradox where, on the one hand fewer suppliers, joint involvement and relationship development is advocated to increase purchasing efficiency (Macbeth and Ferguson, 1994), yet on the other hand the use of the tender/bidding approach is still widely practised. The purpose of this study is to examine the nature of buyer-seller relationships in the electronics industry and the effects of tendering contracts on such relationships. The nature of buyer-supplier relationships Several writers have testified to the importance of relationships in organizational marketing exchange ( Dwyer et al., 1987; Hakansson, 1982; Jackson, 1985). The prediction that within ten years all manufacturers of discrete products will be buying with long-term contracts and close relationships with proven vendors has proved over-optimistic (Purchasing, 1983). Nevertheless, the movement has been continuing over this period and it has come true in some rather than all cases. There is widespread recognition that trust, openness and fairness in partnerships has been increasing (Bhote, 1989). This movement has been mirrored in the marketing literature with the claim that the way to build superior market positions is to build relationships with customers based on trust, responsiveness and quality (McKenna, 1991). The importance to suppliers of retaining existing customers has proved more profitable than winning new customers (Muller, 1991). Greater openness and freer communications between buyer and supplier have been enhanced by the JIT concept (Frazier et al., 1988). This creates an atmosphere which allows suppliers to have a greater understanding of customer plans, minimizes surprises and permits them to be more responsive to customer needs. Differences between transaction-based products and relationship-based products will be important in the extent to which relationships are developed and sustained (Jackson, 1985). Also, firms attempt to move into speciality business with higher-value-added products rather than downgrade into commodity-type trading situations. This has proved profitable for many companies (Wallis, 1987). Among the characteristics of a speciality business which promote closer relationships are the need for product specification, technological orientation and interdependence, requiring frequent communication between the parties. Relationships typically suit both parties, but are not mutual-admiration societies and often involve extensive negotiation, conflict and the desire for favourable outcomes (Clopton, 1984). The trends to outsourcing have been noticeable in a number of industries and there is evidence that co-makership (Merli, 1991) relationship companies were outperforming those organizations still based on a traditional adversarial approach (Masson, 1986). Given the emphasis in the literature, one may be forgiven for seeing relationships as a panacea for inter-organizational exchange. The importance of relationship building is likely to be a function of customer commitment over time, based on technology, risk, strategic importance of investments and switching costs (Jackson, 1985).

What then are the rules, norms and operational dimensions of relationships between buyer and seller? Should they be based on human relationship ideas of friendship, caring, support, loyalty, honesty, trust, openness and self-sacrifice (Duck, 1991)? Should they be based on previous performance or some measure of similarity in managerial attitude or corporate ethos? Morgan and Hunt (1994) have claimed that the key ingredients of relationships should be centred on relational commitment and trust as key mediating variables. The antecedents of these variables might include the anticipated benefits accruing from: relationships; shared values; similarity; open communication; opportunistic behaviour, and termination costs. Many of these constructs seem inadequately defined and have yet to be empirically tested. A review of the literature, and eight interviews conducted with purchasing executives for this research, suggest that the key dimensions of relationships may vary between players and are by no means unequivocal in interpretation. For example, ICI use the concept of the relationship ladder to operationalize the concept in their business (see Figure 1).

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Business (level 3)

Commercial (level 2)

Personal (level 1) Figure 1. Building strong buyer supplier relationships

At level one the relationship is personal, usually, although not exclusively, between the salesperson and the purchasing executive. At level two, the relationship develops as a result of competence and performance by both

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parties, particularly the supplier. This extends the relationship from the personal level to a more complex interaction between organizational members. At level three, the relationship is more strategic and involves joint co-operation, for example, between ICI and Unilever to develop the French market for detergents to their mutual benefit. Relationships are not confined to buyers and suppliers but can relate to other role partners both internally and in some cases even competitors, provided that anti-trust laws are not broken. For purposes of this study we focus on the relationship commitment between buyer and supplier and focus on the individual level. TQM and relationship marketing TQM is a strategic integrated process for delivering customer satisfaction based on continuous improvement and respect for people (Oakland, 1993). This process, exemplified by the Japanese kaizen (continuous improvement) embodies concepts such as learning, system and process development, and innovation. Respect for people includes suppliers, customers and internal employees (Flood, 1993). TQM, being strategic, must have awareness, commitment and the participation of top management who are dedicated to quality action. Given this, short- and medium-term objectives evolve and become established through benchmarking. TQM only happens through people, and hence a feature of TQM is crossfunctional co-operation intra-firm, with relationship building inter-firm between suppliers and customers. Partnering and relationship building necessitate changes in culture within organizations (ONeal, 1989). This is part of an identified trend from traditional adversarial relationships to one which requires trust and mutual respect (Leenders and Blenkhorn, 1980). TQM therefore promotes relationship building by bringing vendors closer to the organizations business activities. Tendering and bidding In contrast to the TQM approach, the idea of bidding in secret against (sometimes) unknown competitors undermines relationships. The focus usually is on price as the key element, yet the tendering process is expensive in time and money for the vendor. In the semi-conductor industry, tendering is normally performed for a given set of criteria in a relatively short space of time. This is clearly not relationship-based at all and may encourage mistrust. Methodology The importance of Scottish electronics as a growth industry, its domination of Scottish exports, the existence of leading world players in Scotland (IBM, Compaq, Motorola, Digital, NCR, NEC, OKI, etc.), the existence of partnering strategies and the commitment to TQM suggest that this is an appropriate industry in which to study relationships between buyers and suppliers. At the same time, this is an industry which is highly price competitive, price sensitive

and which employs tendering and competitive bidding relatively widely. The general characteristics of the electronics industry, in which TQM and tendering coexist, create an interesting environment to test theoretical issues of relationship marketing and TQM with the effects of price competition and tender bidding being used. The Scottish industry is a good sector of world electronics to choose, but we restricted the investigation to semi-conductor manufacturers and their suppliers. Research issues To gain an in-depth understanding of the effects of open-to-tender contracts on relationship marketing, information was sought on five areas. These areas included: (1) Strategic issues, incorporating attitudes to suppliers by semi-conductor manufacturers and by the suppliers to their customers. This section introduced the subject to the respondent in context by using some of the BS 5750, ISO 9000 and Baldrige Award criteria (Oakland, 1993; Pearce and Robinson, 1991). In the research, an attempt was made to assess whether manufacturers had a supplier strategy, the importance of suppliers to the strategic aims of the firm, profitability and quality performance. A five-point Likert scale was used to evaluate 13 items. (2) Organizational issues, covering the extent to which contracts were used for different products and services, formality in appraisal and selection and the use of bidding. Twelve product categories were identified and each assessed in terms of a relationship-based scale (Jackson, 1985). (3) Vendor relationship issues, covering features of relationships, comparison of theoretical and practical issues and differences between routine and problem products (Lehman and OShaughnessy, 1982). The relative importance of reputation, price, quality, delivery, ease of use and length of relationship were included here. (4) Quality and cost implications, including managerial perceptions of quality using six statements as listed below (Deming, 1982; Garvin, 1984): Quality is synonymous with innate excellence. Quality is a precise and measurable variable which is inherently present in the characteristics of the product/service. The user decides what quality is and therefore products and services have to have clusters of attributes which groups of people want. Right first time, conformance and efficiency, design and measured conformance with no waste meaning lower costs. Defined in costs and prices: performance at an acceptable price or conformance at an acceptable cost.

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Quality is surpassing customer needs throughout the life of the product. This assessed the relative importance of quality and company policies towards TQM. (5) Attitudes to tendering and bidding such as its prevalence, frequency of use, products covered. The effects of tenders on quality, total cost and relationship effect were investigated. Research approach Following a review of the literature, this survey was restricted to semiconductor manufacturers and their suppliers which form a major part of the electronics industry. A semi-structured questionnaire was developed which covered some 12 pages using a variety of scaled and closed questions. One or two questions were left open to elicit further responses. To obtain these data via postal questionnaires would have been difficult and response rates could be expected to be low. Therefore personal interviews were chosen which reduced the sample size, but provided greater depth of information. The key respondent was a purchasing, engineering or production executive in the firm. Eight personal interviews were held with managers in semi-conductor firms who had purchasing responsibility, to elicit information on their suppliers and evaluate the approach taken, the processes used and the relevant dimensions relating to TQM and relationship issues. Surveying suppliers to the semi-conductor companies was more problematic, as a wide number of suppliers were available to these semi-conductor manufacturers. To evaluate the concept, it was decided to separate suppliers and their products into strategic/non-strategic categories. Part of the reason for this was that only about 17 per cent of supplies come from within Scotland, but time and resources did not permit travel outside the area. Also the semiconductor manufacturers were reluctant to discuss suppliers by name. In the event, 23 suppliers were interviewed, the sample being taken from named suppliers and the Scottish Enterprise Electronics and Support Companies Database, 1991 (Scottish Enterprise, 1991). A similar semi-structured questionnaire was used for these interviews and covered the same five areas as the manufacturers survey. Results Semi-conductor manufacturers Strategic. All semi-conductor manufacturers had a supplier strategy embracing quality, teamwork and continuous improvement. Some were pursuing the Malcolm Baldrige Award, the European Quality award scheme, or alternative models of quality performance. Supplier rating schemes, benchmarking and matrix teams were concepts being used and these companies seemed to be embracing long-term relationships with suppliers. They agreed that suppliers were very important to their strategic aims, long-term profitability and quality

performance. Only one or two preferred a wider supplier base than they currently had. There was convincing evidence of awareness, participation and commitment to TQM. Vendor relationships and performance measurement were seen to be very important, but there was a gap between promoting partnerships and realizing them. To assess their quality approach, respondents were evaluated in terms of the characteristics and behaviour which their organizations displayed in relation to TQM issues (Lascelles and Dale, 1991), on six levels, as follows: (1) uncommitted; (2) drifters; (3) tool pushers; (4) improvers; (5) award winners; (6) world class. In terms of this quality scale, companies lay between level two (drifters) and level four (improvers) with no level one and no levels five or six. Organizational. Most respondents (six out of eight) claimed to use both formal and informal assessment methods for suppliers. Inviting vendors to bid for contracts was used in almost all cases, but not for all products. Some one-off items, considered unique in character, were subject to individual negotiation. The reason given for this was primarily the higher and proven quality of these suppliers. However, if the potential purchase was above a certain monetary value, different criteria operated and a number of vendors would be asked to quote. The 15 product/service categories identified in this research were assessed on a five-point scale from 1, a purely physical product (tangible), to 5, pure service (intangible). Further, using the criteria established by Jackson (1985) to separate transaction- and relationship-type products, the 12 product categories were evaluated. Only five of the 12 categories scored above the mean as relationship-type products. Generally, the results suggest that the foundations are in place for relationship building but, despite TQM, the dedication to partnerships and long-term strategic alliances is undermined. For certain products and services, the use of tendering and bidding for contracts does affect long-term partnerships and relationships. Dimensions thought to be important in a mature relationship or partnership were not extensively undertaken. These include activities such as working with vendors on new products, more effective systems or joint cost-reduction programmes; relatively few companies agreed that they undertake these activities. Particularly for non-strategic products, despite high switching costs, investment and risk, vendors do not see the need for working closely with suppliers to the extent advocated in the literature. Vendor relationship issues. Questions in this section assessed the weighting given to supplier selection criteria on factors such as price, quality, delivery and

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service (reputation, ease of use, length of relationship). Previous studies for critical products would suggest quality would be the prime factor. This was also the case in this survey. For non-strategic products, price was the prime factor which contrasts with other research in routine order products where delivery reliability, price and supplier reputation were rated more highly (Wilson, 1994). Quality and cost implications. The most popular definition of quality (four respondents) was Demings TQM philosophy, followed by Garvins conformance to standard, a user-based definition and value based. The TQM philosophy is understood and seemed to be permeating organizational structures. Attitudes to tendering and bidding. All the organizations in this survey confirmed that the tendering bidding process had been and was currently in use, although when asked if this was likely to change, the research received a more mixed reception. Some saw that the use of benchmarking would place less reliance on the tender process. Using tenders was generally company policy and not left to department or individual discretion. Individuals perception of the effects of tendering on TQM were interesting. Competitive bids will always result in the most attractive price being obtained but care must be taken to ensure quality is not affected. Another suggested that tendering is not as effective as TQM. Tenders were seen by some as a win or lose situation. One respondent admitted that tendering was a mercenary attitude, but if you define what you want and get it at the best price whats wrong with that? The managers saw the contradiction between tenders and relationship building, and realized that it was not the TQM approach or partnering strategy being recommended, but they claimed to be constrained by organizational policy. Suppliers/vendors. While the research issues are the same as in the previous section, the low number and wide spread of suppliers in this survey (23 in number) mean that the results should be treated with some caution. Strategic. First, only 60 per cent of respondents considered semi-conductor manufacturers as very important to their strategic aims. However, all suppliers rated customer relationships as of very high importance to their business. Even where the semi-conductor industry was not perceived as critical to their business, they were still pursuing relationship strategies. Only 12 of the suppliers pursued a niche-marketing strategy aimed at the semi-conductor manufacturers. In general, the suppliers seemed to lack a clear market focus and had inadequate planning to develop their relationships. The companies saw relationships with everyone as a good thing per se. The results, however, are inconclusive. Organizational. There was a degree of similarity with the manufacturers, in that clear distinctions between strategic and non-strategic purchases could be identified. Suppliers rated themselves highly on their understanding of customer needs and on the qualitative aspects of relationships a view not shared by their customers the semi-conductor manufacturers. This contrasts with the buyers view and suggests a lack of understanding of their position

relative to their customers a marketing deficiency. What kind of relationship they think they are carrying out well, is obscure. Despite their strategic orientation, working with customers to develop new products, reducing costs and developing more effective systems all scored moderate to low. The answer would seem to lie in aspects not covered or tested in this survey, or, more likely, they are paying lip service to relationships without real involvement or commitment. Alternatively, suppliers perceptions may be correct and the price commodity evaluation is a more accurate description of how manufacturers really select suppliers. Overall, the results were similar to the manufacturers. Vendor relationship issues. There was a variety of responses here, and even the strategic suppliers, who should have focused on quality as stated by the semi-conductor manufacturers, claimed customers bought for a variety of reasons. For example, a production machinery supplier rated quality, but a computer-systems supplier cited reputation, as the main buying factor. Several of the suppliers, in line with the manufacturers responses, saw price as the key factor. The results indicate that there is a general lack of appreciation of their customers true needs, which points to a lack of understanding or inadequate communication and certainly questions the form of the relationship claimed to be operating between the parties. It was apparent to the interviewer that most of the vendors were technology- and sales-driven rather than customeroriented, which may account for the discrepancy. Most suppliers had marketing and sales in the same department and the salesforce had the bulk of the contact with their customers. Relationships seemed to be vested in one person rather than in organizational interaction. Quality and cost implications. The results here were different from the manufacturers, 65 per cent chose conformance to standard, the manufacturersupplier-based approach as their perception of quality and 25 per cent the Deming approach. Those with a higher degree of intangibility tended to choose the Deming approach, whereas the more tangible raw materials for example chose the conformance approach. Attitudes to tendering and bidding. The results indicate that suppliers saw the tender-bidding approach as a win/lose situation, and this is reflected in their different perception of quality. To achieve the lowest price was the priority with quality, specification and delivery being given and non-negotiable. Conclusions This research has shown that, despite TQM and supply-chain management practices being widely used, relationships are undermined by the tenderbidding process. This conflicts with the so-called rules of relationships such as trust, openness and commitment. TQM and the tender/bidding process clearly have different effects on the development of relationships in inter-organizational exchange. This study shows that they do coexist, but the one undermines the other. There is some evidence that, for strategic purchases, although semiconductor manufacturers are moving to longer-term, open-ended contracts

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based more on benchmarking, company policies still require the tendering process be used. There is a fundamental conflict, at least in specified time periods, between using tender contracts and relationship building. Both in their perceptions of quality and in their view of products as relationship-based, there were discrepancies between buyers and customers, and basic misapprehension. The tendering process does conflict with the ethos and operation of relationships. As yet, we appear unable to express tangible ways for these two ideas to coexist. Lascelles and Dale (1991) discussed the various stages that organizations may follow in their quest for total quality management, and it may be that suppliers have yet to catch up in this quest. This research also indicates that, although the opportunity for following a relationship-marketing approach was there, in general those vendors who were in a position to do so were not grasping the opportunity in full. Of those suppliers interviewed, 40 per cent did not have a formal marketing department and appeared to be more sales- than customer-driven. Relationships did not rise above level one on the relationship ladder. In some cases, the relative power of the parties may account for this with a fear that outsourcing could move back in-house. Suppliers, in general, accepted the tendering position and therefore attempted to build the relationship after the contract was won. Shortterm and long-term relationships mean that quite different approaches are taken by different firms, depending on contingent conditions. Tendering does affect relationships, but it is inappropriate from this research to conclude that it is a bad thing. Indeed, companies were, in general, satisfied with the outcome of the bidding process. TQM is widely used, but there is a difference in approach between strategic and non-strategic purchases for most firms. While the main motive in strategic purchases is price, with quality and delivery given, the use of tenders conflicts with the relationship-based approach. What is required is a move from a dependency culture, based on short-term measures, to a development culture, but in a relationship which still has safeguards for price and innovation. The use of tendering for contracts suggests dependent suppliers, a short-run focus and long-term anonymity. The opposite approach is joint supplier involvement and partnership, suggesting a development strategy which is more innovative but may be more expensive for the buyer, or perceived as such, in the short run. These findings suggest that further research is required in a number of areas: Clearer definitions of the rules and norms of business relationships are required, particularly taking account of issues of power, commitment and the bargaining position of both parties. Qualitative research using in-depth case studies is likely to be the most productive vehicle in pursuit of this objective.

Longitudinal research, both within firms and across firms in a given sector, will help in understanding the triggers to more complex relationship building and to evaluate how successful communication takes place between the parties. Quantitative studies will be helpful in categorizing relational forms. These may be, for example, supplier or buyer dominant, relatively discrete or opportunistic, or close, committed and bilateral. Such studies may require multiple respondents within both buyer and supplier organizations. Quantitative studies may also be used to calibrate relationship strength and intensity between the participants in different relationship settings. Finally, follow-up cases could further assist our understanding of the origins, development and complexity to be found in different relationships.

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Morgan, R.M. and Hunt, S.D. (1994), The commitment-trust theory of relationship marketing, Journal of Marketing, Vol. 58, July, pp. 20-38. Muller, W. (1991), Gaining competitive advantage through customer satisfaction, European Management Journal, Vol. 9 No. 2, June, pp. 201-11. Oakland, J.S. (1993), Total Quality Management: The Management of Change through Process Improvement, 2nd ed., Butterworth and Heinemann, Oxford. ONeal, C.R. (1989), JIT procurement and relationship marketing, Industrial Marketing Management, Vol. 18, pp. 55-63. Pearce, J.A. and Robinson, R.B. (1991), Strategic Management, 4th ed., Irwin, Homewood, IL. Purchasing (1983), How tomorrows suppliers shape up, January, pp. 80-5. Scottish Enterprise (1991), Electronics and Support Companies in Scotland Database. Waller, D. (1994), Mercedes saves DM 1bn through supplier projects, Financial Times, 24 February, p. 34. Wallis, J.S. (1987), Will a speciality business become a commodity business? Industrial Marketing Management, Vol. 16, pp. 19-24. Wheatley, M. (1994), Score card for the suppliers, Financial Times, 2 March, p. 26. Wilson, E.J. (1994), The relative importance of supplier selection criteria: a review and update, International Journal of Purchasing and Materials Management, Summer, pp. 35-41. (Bill Donaldson is a Senior Lecturer at the University of Strathclyde and Director of the Honours Programme in the Department of Marketing, University of Strathclyde, Glasgow, Scotland.)