Customer supplier relationship in organization theory and design

customer supplier relationship in organization theory and design

This paper approaches the customer-supplier relations in tailored offshore software development interviews, and analyzed it through a grounded theory approach. Our analysis . into the human organizations in software development . The overall .. R. K. Case study research: design and methods, Sage Publications. KEYWORDS: supply chain, simulation, cooperation, decision theory, risk . Recently, many organizations have emerged to encourage trading partners to concern regarding cooperation in a supplier-customer relationship. D.J recommended a minor change in product design that reduce the product Customer-Supplier Relations in Organizational Theory In

customer supplier relationship in organization theory and design

Purchase complexity might also be related to the type of product or service and to the nature of the buying task new spend or renewal of an existing contract. Finally, time pressure might be a function of the nature of the buying task. The relationship suggested by the literature between different levels of procurement risk and various aspects of organisational buying behaviour intended to mitigate that risk is illustrated in Figure 6.

It is argued that, as the risk associated with a buying decision increases, the group of actors involved in making the decision, known in this literature as the buying centre, will become larger and more complex.

In other words, more people will be involved in high-risk buying decisions and they will be drawn from a wider range of departments or organisational subunits with different preferences and agendas.

The participants involved in a high-risk buying decision will also typically be more highly qualified and experienced, and will be motivated to commit greater attention throughout each stage of the procurement process. Role theory has been used by a number of authors to examine which organisational functions participate in buying decisions and what specific roles they play.

The use of power and politics rather than a collaborative or problem-solving approach to conflict resolution is a result of the high stakes associated with important purchasing decisions, particularly where certain departments represented in the buying centre might be negatively affected by the purchase outcome. In these circumstances, participants will be reluctant to make concessions without some type of compensation.

In a complementary vein, other authors have discussed actor behaviour through the lens of behaviour choice theory. As Tanner 72 argues, the actors involved in a buying decision may be more focused on using the process to demonstrate and develop their management and decision-making skills than on the outcome of acquiring a particular good or service. As Johnston and Lewin 59 note, the particular decision rules used in any given procurement situation are fundamentally firm-specific, but the literature does still suggest that, in general, there will be a preference for more formal control mechanisms and decision guidelines as procurement risk increases.

The logic here is that, as the buying centre for a high-risk decision will be larger and more complex, the governance mechanisms need to be much more explicit and detailed to ensure that they are clearly understood by all involved. By contrast, because lower-risk procurement decisions are expected to involve a smaller and less diverse group of decision-makers, the decision-making process can be governed more informally and tacitly. In terms of searching for information about supplier options, the literature suggests that this will become more active and extensive as procurement risk increases.

For a high-stakes buying decision, buying centre participants will be strongly motivated to access a wide variety of formal trade journals and sales literature and informal personal industry contacts information sources. This can be seen as an effort to mitigate the uncertainty and complexity that characterise high-risk procurement decisions.

Moreover, it is argued that known suppliers offering well-proven products and services will be favoured in high-risk situations, and there will be an emphasis on non-price selection criteria i. For less important, less complex, less uncertain and therefore lower-risk procurement decisions, by contrast, buying centre participants will use price as the dominant selection criterion and seek to stimulate competition from as wide a range of suppliers as possible.

Building on the points above, the literature also suggests that, in situations of high risk, buying centre participants will favour suppliers with which their organisation has strong prior relationships and well-established networks of communication. These features are seen as an important means of mitigating purchase uncertainty, complexity and time pressure by facilitating buyer—supplier co-operation and information exchange. Turning now to criticisms of the organisational buying behaviour literature, these are primarily made by contributors to the literature offering a competing vision of how it should develop.

Two main strands can be identified in such critiques.

Customer-Supplier Relationship | Total Quality Management

First, it is argued that the literature has traditionally been too focused on discrete transactions from the buying organisation perspective and has given little, if any, insight into ongoing buyer—supplier relationships. As we have discussed, the organisational buying behaviour literature traditionally places emphasis on the mitigation of risk in procurement decisions.

The possibility that the procurement process might deliver cost and innovation benefits from suppliers receives very little attention.

customer supplier relationship in organization theory and design

The need to deliver these objectives has, in turn, led them to adopt longer-term and more co-operative relationships with many of their suppliers. Tanner 72 counters this argument, however, by suggesting that the organisational buying behaviour literature may still have insights to offer to an understanding of buyer—supplier relationships, particularly in terms of thinking about what happens inside the buying organisation that has an impact on relationships with particular suppliers.

Key strands of this literature draw on agency theory and TCE. Agency theory applies broadly to circumstances in which one actor the principal delegates responsibility for the execution of valued activities to another the agentand the principal needs to ensure that these activities are undertaken in a way that serves his or her interests rather than those of the agent.

Opportunism is defined as self-interest seeking with guile, 86 which extends the notion that actors simply aim to maximise their self-interest in an open and honest way to include blatant and subtle strategic behaviour. These theories, therefore, focus attention on the various behavioural hazards that can arise when a buyer engages an external supplier to deliver a good or service.

They are underpinned by an assumption that both buyer and supplier are individual utility maximisers, and that consequently the latter is not likely to always act in the interests of the former. These theories diverge on the issue of actor rationality, however.

Agency theory assumes, like classical economics, that actors are rational and are, therefore, unencumbered in their capacity to make decisions based on all of the information available to them. It does acknowledge, however, that information relevant to an interaction between a principal and an agent is not necessarily perfectly or costlessly available to both parties.

Rather, one party might be less well informed than the other and, therefore, be faced with a situation of information asymmetry. TCE, by contrast, assumes that actors have inherent bounded rationality.

Stakeholder theory

This means that they make rational decisions, but within the limits imposed by a restricted cognitive capacity. These different assumptions about actor rationality have important implications for the suggestions made by these theories about how best to manage the hazards of supplier opportunism.

customer supplier relationship in organization theory and design

The theories discuss the mechanisms, contractual or otherwise, that are available to mitigate such hazards and identify the agency or transaction costs that are incurred in using these mechanisms. The focus for agency theory is on the use of contractual mechanisms.

With an assumption of full rationality, agency theory argues that it is possible ex ante to design complete contracts covering every conceivable contingency that might impact on a buyer—supplier transaction.

The agency costs incurred in mitigating supplier opportunism are thus primarily associated with contract drafting, to design incentive structures and monitoring regimes, and with contract enforcement or supplier bonding. TCE assumes bounded rationality. This means that contracts designed ex ante tend to be incomplete and, therefore, cannot solely be relied upon to mitigate supplier opportunism. This can be the threat of simple spot market contestation, which has very low transaction costs, or the use of more complex bilateral or unified management mechanisms monitoring, negotiation and adjudication that have higher transaction costs.

TCE is concerned with mitigating the hazards of opportunism in the most cost-efficient way for each transaction.

customer supplier relationship in organization theory and design

The basic argument, then, is about the appropriate alignment of governance alternatives with transactions. A simple, low-cost governance mechanism spot market is suggested for transactions with a low potential for opportunism, while more complex and higher-cost bilateral or unified governance mechanisms are suggested for more hazardous transactions.

All of these behaviours involve a supplier exploiting an information asymmetry advantage over a buyer to win and execute a contract on an unfair or misleading basis. The information economics literature draws attention to the notion of search, experience and credence goods. In this case, it is possible ex ante to design a simple complete contract as proposed by agency theory or to use spot market governance as proposed by TCE. Here, agency theory would suggest that one could still design ex ante a complete contract using standard terms and conditions to specify desired performance outcomes, but that this should probably be offered on a short-term trial basis in the first instance to incentivise supplier adherence.

TCE would suggest a bilateral governance mechanism, which might include financial performance bonds bonusesto complement an incomplete contract. The problem of information asymmetry is most acute, however, in the case of credence goods. Here the buyer cannot acquire the necessary information, even after consumption, to assess whether or not he has received good value for money.

Professional services, including legal services and management consultancy, are all classic examples of credence goods which are particularly prone to adverse selection and moral hazard problems. The supplier will therefore be in a position to deliver, or underdeliver, the service in a way that increases its returns, but which the buyer will find it difficult to detect.

In this case, agency theory still suggests that the solution is to design a contract ex ante, but that this should be a hybrid partly specifying desired performance outcomes and partly creating incentives for non-opportunistic behaviour during contract delivery.

This draws on arguments made by the behavioural variant of agency theory, 82 which moves closer to the tenets and recommendations of TCE by acknowledging that complete ex-ante contracting is sometimes impossible. Hold-up is another opportunistic behaviour, discussed using a TCE lens in particular.

The complexity and long time scales associated with such contracts tend to result in contractual incompleteness, which creates the scope for renegotiation and therefore hold-up. First, the validity and robustness of its behavioural assumptions is challenged. Critics argue that the assumption of pervasive actor opportunism, founded on an individualistic and maximising view of human nature, is simplistic and ignores the complexity of individual motivation and behaviour in an organisational context.

Second, this literature is criticised for what is seen as an overly narrow focus on the costs associated with discrete transactions. These theories are solely interested in understanding how to achieve efficient outcomes at the level of individual transactions, and ignore the fact that these transactions often occur in the context of, and are influenced by, ongoing buyer—supplier relationships.

Networks and interorganisational relationships A third broad category of literature, addressing networks and interorganisational relationships, focuses our attention particularly on the ongoing management of supplier relationships phase 3but also touches on supply innovation and performance improvement phase 4, step 8. This literature, like that addressing organisational buying behaviour, has its roots in organisational and economic sociology, but here the focus is outwards, on the ongoing interactions between firms in the context of their wider environment.

Given the breadth of this literature, it is useful to discuss it in terms of a number of different subsets, which have overlapping theoretical roots but differ in some of their basic assumptions, particularly about the scope for planned management action in a network context. The first major subset is commonly referred to as the industrial network approach and is associated with the work of authors in the Industrial Marketing and Purchasing Group.

The unit of analysis here is both the buyer—supplier relationship and the network within which it is embedded. The focus of discussion is on both the structure and the dynamics of relationships and networks. This literature has thus made a major contribution to the development of the concept of the supply network, and has shown how a proper understanding of buyer—supplier relationships requires attention to both economic investment and adaptation and behavioural conflict and mutuality aspects.

The Actors—Resources—Activities framework has been a particularly influential model in this approach. One of the key insights offered is that a single buyer—supplier relationship can be characterised by both competitive and co-operative behaviour, either simultaneously on different levels within each organisation or at different times in the relationship.

Another is that change in buyer—supplier relationships is best seen in emergent, unplanned terms rather than as a result of conscious planning. In this way, firms are seen as organic and adaptive rather than mechanistic and rational. Two other key assumptions of the industrial network approach should be emphasised. The first is that the specific context and history of a buyer—supplier relationship are crucial for understanding how and why the actors in that relationship behave as they do.

Second, actors are assumed to have bounded rationality and as a consequence have only a limited understanding of their network environment.

Moreover, the content of this limited understanding is assumed to be highly specific at an individual or group level, with different actors even within the same organisation enacting different interpretations or worldviews of the same network.

An associated subset of the literature, focusing in particular on the role of trust in interorganisational relationships, is relational contract theory. One is that dealing with notions of focal networks and strategic nets. The key issues for this perspective are to understand the roles and network positions that an actor can try to achieve in its perceived focal network, and to understand the process by which an actor forms its picture or theory of the network.

Because both the customer and suppliers have limited resources, they must work together as partners to maximize their return on investment. There have been number of forces that have changed supplier relations. Prior to the s, procurement decisions were typically based on price, thereby awarding contracts to lowest bidder. As a result, quality and timely delivery were sacrificed. He stated that customers must stop awarding business based on the low bidder because price has no basis without quality.

In addition, he advocated single suppliers for each items to help develop a long-term relationship of loyalty and trust. These actions will lead to improved products and services. Another force changing supplier relations was the introduction of the just-in-time JIT concept. It calls for raw materials and components to reach the production operations in small quantities when they are needed and not before. The benefits of JIT is that inventory-related costs are kept to minimum.

Procurement lots are small and delivery is frequent. As a result, the supplier have many more process setups, thus becoming a JIT organization itself. The supplier must drastically reduce setup time or its cost will increase. Before there is little or no inventory, the quality incoming material must be very good or the production line will be shut down.

To be successful, JIT requires exceptional quality and reduced setup time. The practice of continuous process improvement has also caused many suppliers develop partnership with their customers. A final force is ISOwhich is mandated by the major automotive assembly firms.