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Supplier Development in Indian

Organizations

Rashi Taggar 1 Abstract

The primary aim of this research paper is to examine the


key factors of supplier development which the buyer uses to
help developing the key-input supplier. To address this, an
empirical study was conducted on 150 buyer organizations.
This important dimension was analysed with the help of
statements framed after conducting interviews with the
procurement officials of the select organizations. The use of
factor analysis has helped in extracting important aspects
like direct assistance, support, regulation and business
potential of supplier development. The effect of each key
aspect on supplier development has been examined. This
paper provides an insight into various factors accountable
for developing the supplier for strategic development of
relationship between the buyer and the supplier. This
positive relationship development leads to benefit both the
partners. So this research can be of practical use to the
organizations attempting to focus on supplier development
soastomaintainstrategic dyadic relationshipinthe longrun.

Keywords:
Dyadic relationship, key-input supplier, supplier
development

Introduction
There is a change in trend – it is not the traditional
purchasing department anymore, but the concept of whole
supply chain. Organizations strive to achieve sustainable
1
Lecturer, College of Management, and profitable supply chains that respond quickly to
Shri Mata Vaishno Devi University,
Katra, Kakryal, J & K. market changes. For this required sustainability, the
E-mail : taggar.rashi@gmail.com organizations are focusing on relationship development
26 Bi-annual Journal of Asian School of Business Management, Vol. VI, Issue I, January 2013

with the other members of the supply chain, the their firms. The results of this exploratory study
need of the hour being mutual business suggested that buying firms often directly
perspective where a win-win situation exists. This involve them sel ves in their suppliers'
collaboration perspective is the basic requirement performance and capabilities problems.
to develop the partner and further the dyadic According t o Krause (1999), suppl ier
relationship of buyer and supplier. development broadly refers to any effort by a
buying firm to improve a supplier's performance
The relational view also says that investments are and/or capabilities to meet the buying firm's
made by buyers in the development of suppliers in short- and/or long-term supply needs and
order to accrue tangible benefits such as reduced according to Handfield et al. (2000) supplier
cost, greater quality and flexibility and more development involves those activities a buyer
reliable delivery. When Harley Davidson started firm undertakes to increase supplier capabilities
taking help from its key input suppliers, the and/ or performance. Choi and Choi (2002)
output of bikes was increased and also the studied the change in trend of dealing with
inventory period could reduce from 15 to 6.5 suppliers in Korea after the economic crisis and
days. M&M's suppliers' technical assistance has found that to meet the impending economic
helped in co-des igning the vehicles challenges in the aftermath of the Asian economic
manufactured. These two companies have made crisis, many organizations in Korea turned to
the relational investments and also procured the supplier development. The shortage of funds led
benefits from entering into such strategic to reduction of the supply base so as to focus on a
relationship. few suppliers for development by providing them
independence and technology up gradation.
Review of Literature Working together cooperatively in this fashion
Various empirical studies have shown the led to reduction in development lead time and no
assessment and importance of Supplier additional testing of products developed. The
Development. A number of studies have been authors believe that Korean companies took the
attempted regarding this important dimension of right measures after the crisis to establish a more
buyer supplier relationship across the world and it balanced supply chain. Supplier Development
is imperative to offer an account of the studies so was pioneered in the automotive industry such as
undertaken by different researchers and Toyota and Honda which are the masters at
academicians. supplier development initiatives. (Wagner et al
2003). Humphreys et al. (2004) examined the role
For the first time the term 'supplier development'
of supplier development in the context of
was used by Leenders (1966) to describe efforts
buyer–supplier performance from a buying firm's
by manufacturers to increase the number of viable
perspective and concluded that transaction-
suppliers and improve suppliers' performance
specific supplier development, trust, supplier
whi le disc ussi ng a ca se of Ca nadi an
strategic objectives and effective
manufacturer. Further study of Honda Motor
communications significantly contributed to the
Company by Hahn et al. (1990) emphasized on
prediction of buyer–supplier performance
phases of supplier development followed by the
improvement. Wagner (2006) examined the
company for improving performance.
relationship between supplier development,
Krause and Ellram (1997) explored the success improvements and the support of the customer
factors in supplier development via survey which firm's competitive strategy with the resource-
solicited buyers' perceptions about a single based view and the relational view as theoretical
instance of supplier development performed by explanatory perspectives. The results showed
27

that appropriate supplier development activities companies surveyed said they were effectively
are powerful to substantially back up the carrying out a range of supplier collaboration
customer firm's differentiation as well as cost activities, including the use of information
leadership strategy. The author also expressed systems (89 per cent), open-innovation
that supplier development in channel research is a environments (80 per cent) and involvement in
widely neglected inter-firm relationship the innovation process (79 per cent). The report
management practice, and should therefore also found that manufacturers are increasingly
receive more attention from practice and
turning to collaborative business models,
research. Wagner (2006) defined supplier
processes and technologies to gain competitive
development as supporting the supplier in
advantage in their innovation efforts across all
enhancing the performance of their products and
parts of the value chain, including through
services or improving the supplier's capabilities.
supplier, R&D and customer collaboration. This
A growing body of research suggests that collaboration perspective is the basic
maintaining cooperative relationships with requirement to develop the partner and further the
strategic suppliers can improve a buying dyadic relationship of buyer and supplier.
organization's performance (van der Vaart and
van Donk, 2008). Suppliers are not dealt with The relational view also says that investments are
short term perspective but now the suppliers have made by buyers in the development of suppliers
become strategic for the sustainability and in order to accrue tangible benefits such as
profitability of the organizations. Buyers could reduced cost, greater quality and flexibility and
reap benefits not only in the short-term but also in more reliable delivery. Buying firms in
the long-term by managing suppliers strategically manufacturing industries, including automotive
(Talluri & Narasimhan, 2004). According to Shah and electronics, have four primary competitive
(2009), successful dyadic relationship building priorities in their end-markets: cost, quality,
involves the following three elements: delivery time and reliability and flexibility (Ward
et. al. 1998).
1. Designing relationship with cooperation and
trust A study by Krause et. al. (2007) investigated the
relationship between U.S. buying firms' supplier
2. Managing and nurturing relationships
development efforts, commitment, social capital
3. Redesigning relationship with change in accumulation and performance improvement.
environment Performance outcomes in quality, delivery and
Successful relationships aim to integrate channel flexibility appeared to depend more on supplier
policy to avoid redundancy and overlap while development than cost performance outcomes.
seeking a level of cooperation that allows Supplier development research has concentrated
participants to be more effective at lower cost on developed countries, such as the US, Europe,
levels (Lassar and Zinn 1995). The imperfect and Japan (Krause et al., 2000; Krause et al.,
nature of industrial markets also favors the use of 2007; Sanchez-Rodriguez et al., 2005; Wagner,
more sophisticated mechanisms of relationship 2006; Sako, 2004).
governance than mere competitive bidding to
Researchers have empirically investigated a
dri ve l earning and innovation, within
variety of research issues related to supplier
partnerships and business networks (Ahmadjian
development activities. These issues include
& Lincoln 2001; Knight 2002).
critical factors of supplier development (Krause
According to the Capgemini report, most of the and Ellram, 1997); the process of supplier
28 Bi-annual Journal of Asian School of Business Management, Vol. VI, Issue I, January 2013

development (Hartley and Choi, 1996; Krause et of dyadic relationship (Krause et al., 1998). Such
al., 1998); the factors that influence buying firms' is the importance of supplier development
involvement in developing their suppliers activities that the dyadic relationship between the
(Krause, 1999); and the effect of technical buyer and supplier can improve leading to
support provided to suppliers. (Krause, 1997; positive performance outcome for the benefit of
Prahinski and Benton, 2004) and buyers (Krause whole supply chain.
et al., 2000). Objectives of The Study
All of these studies, however, are from developed To find the key factors considered important by
nations where the trend to invest in supplier the buyer for developing the supplier to enhance
development is at its boom and also these buyer- the quality of relationship between the two.
supplier dyads are reaping benefits from this
dimension. In developing nations, however, the Research Methodology
concept of a balanced supply chain is still at a The primary data has been taken in this
nascent stage. So in a country like India, descriptive research from seven different
developing the supplier takes a completely industries. 150 organizations (Chart 1) from these
different perspective with emphasis on different industries were surveyed with the use of
aspects. questionnaire developed after the interview
With this backdrop, the present study is process from fourteen organizations (two
conducted by taking into consideration not one organizations from each sector). The data
industry but many industries, so as to analyze the collected was further analysed by using the
present situation existing in buying organizations statistical package SPSS 15.
of North India and their relationship orientation
towards their key input supplier. By this study the
dimension of supplier development from the DataAnalysis
buyers' perspective is studied so as to find further The interview was conducted with the
the important factors involved and the procurement officials of 14 organizations so as to
significance of these factors individually to the find out the various ways used by the buyer in
dimension taken. Deriving these factors can help developing the supplier. These ways were
in understanding their importance to rationally constructed in the form of items to be asked in the
use them in maintaining and developing the questionnaire. The buyers were also asked how
dyadic relationship as supplier development has much they agree that they are involved in
the target of creating a supply base that provides developing the supplier. The answer to this
sustainable competitive advantage (Krause et al., statement has been used in associating its
1998). Supplier development and its factors relationship with the factors extracted (by the use
significantly correlate with the perceived buyer- of regression analysis).
supplier performance outcomes (Humphreys et
al., 2004). Partnerships succeed when they Reliability of the questionnaire administered has
develop dyadic relations through investments in been checked with the Cronbach's alpha value in
assets and shared know-how (Dyer and Singh, Table 1 which supports that the questionnaire
1998). Supplier development efforts improve the administered to the buyers is reliable as Cronbach
performance of both suppliers and buyers alpha value is greater than acceptable value of 0.7
(Krause et al., 2000; Prahinski and Benton, 2004) (Cronbach and Shavelson 2004). The items
and these activities improve the relational skills constructed for the questionnaire to check how
29

much the buyers agree (1= strongly disagree to 5= training, Management Training)
strongly agree) to use for developing the supplier The third factor consists of guiding the supplier
are: for waste elimination and visiting the supplier's
1.Special investments made plant/capacity.
2.Functional training for skill enhancement Factor 3: Regulation (F3) = (Guiding waste
elimination, Visiting Supplier's capacity)
3.Enhancing overall business potential of
supplier The fourth factor includes one item only i.e.
buyer's concern for enhancing supplier's overall
4.Personnel training for better management
business. This is named as “Business Potential”.
5.Helping in eliminating wastes
Factor 4: Business potential (F4) = (enhancing
6.Regularly visiting suppliers' plants/ capacity suppliers' overall business)
location The regression analysis (Table 3) has been
7.Financial assistance employed to see the effect of these extracted
factors in supplier development so as to prioritize
8.Personnel assistance
them according to the values associated with
9.Purchasing suppliers' capabilities them. The Durbin Watson's value of1.8 supports
10.Fixing the problems the assumption as it is falling closer to value 2 as
required for assumption support. As observed,
The factor analysis (Table 2) was run on items of 2
the value of R , a measure of how much of the
supplier development, which yield the rotated variability in outcome is accounted for by the
component matrix. The factors with loadings antecedents, as seen in the model is 0.858which
more than 0.5 were accepted under the factors means that 85.8% percent of the total variance in
categories extracted and named further on the development dimension from the factors
basis of nature of factors falling under the specific considered in buyer supplier relationship has
categories for the dimension as follow: been explained.
The first factor extracted consists of four items, The adjusted R2 for the model helps in
which are financial assistance, personnel determining the value of shrinkage if the model
assistance, purchasing supplier's capabilities and were derived from population rather than a
fixing the problems of supplier. Thus collectively sample. R2- adjusted R2 i.e. 0.858-0.854 = 0.004
we can name this first factor, represented by F1, as or 0.4% less variance in outcome would have
“Direct Assistance”. appeared if the whole population is taken. The
value of F is highly significant (p<0.001) and
Factor 1: Direct Assistance: (F1) = (Financial, supports the consideration for the model on the
Personnel, Problem fixing, Purchasing supplier's basis of significance and ability to predict the
capabilities) significance levels of factors of supplier
development. The regression analysis (Table 5)
The second factor extracted consists of three
has helped in generating the following equation:
it em s, w hic h a re Funct iona l tra ining,
Management training provided to suppliers and Supplier Development =
specific special investments made for supplier. 0.339F1+0.272F2+0.203F3+0.125F4+0.50+μ
This factor has been named as “Support”. (error).
Factor 2: Support (F2) = (Investments, Functional This equation confirms the value addition by each
30 Bi-annual Journal of Asian School of Business Management, Vol. VI, Issue I, January 2013

factor extracted in supplier development and suppliers' profit will be increased by making
dimension. These factors contribute to the overall better parts and finished goods than their
development of the supplier by grafting the use of competitors', and it will contribute to the tighter
assistance, support, regulation and assumption of coordination than ever before (Lee et al., 2001).
overall upkeep of the supplier's business. As Although in this study supplier development is
observed in the equation, direct assistance still not the priority of buyers and whatever
contributes maximum to the dimension of development efforts are taken by the buyer, they
supplier development followed by support, are limited to certain area only and also only a
regulation and business potential. Most of the few suppliers (key-input) may be developed by
buyers in our study were indulged in these efforts the buyer.
of assisting the suppliers in terms of money,
skillful people required to perform at suppliers' Krause et al. (1998) suggested that some firms
location, providing the solution to problems faced are reactive in supplier development efforts,
by the supplier and purchasing suppliers' meaning that they attempt to develop their
capabilities for smooth functioning of the suppliers after a problem actually occurs. In
processes undertaken. Support is provided to the contrast, firms wanting to create a first-rate
supplier only when asked or as a solution to the supply base that can provide a competitive edge
problems faced by them. This support is in terms over the long-term adopt a proactive approach;
of specific investments for developing the they identify crucial commodities and the
supplier and providing management and suppliers of them that require development. In
functional training. Those buyers who have our study, the problems faced by the supplier in
concern for green management approach, only terms of finance, requirement of skill full
those have supported the supplier in eliminating personnel, capability improvement to enhance
the waste which also enhances efficiency of the the utilization capacity are tried to be solved
supply chain. Also frequent visits by the buyer to when the supplier actually discusses these
inspect supplier's location are not readily problems with the buyer and also the buyer gets
observed by the buyers. Enhancing business affected with the problem, so the proactive
potential of supplier is possible only when the approach is still lacking in Indian context.
buyer is developing the supplier in all aspects, The buyers invest in suppliers' development by
which is still an admirable aspiring effort to be investing in their plant locations and further
done by the buyers in Indian context. providing functional and management training
Discussion for process improvement. The ultimate objective
of providing training to suppliers is to improve
A survey of 200 Chief Procurement Officers by suppliers' quality, flexibility and delivery
the Aberdeen Group suggests that improving performance and to reduce their costs (Krause et
supplier development is a top priority for the best al., 1998) by teaching them how to continuously
performing supply management organizations improve their operations. Krause et al. (2000)
(Checketts and Bartolini, 2006). Applying the and Krause et al. (2007) have discussed that by
managerial criteria in the supplier development concentrating on training, the supplier
and support would improve the quality of performance improves, thus leading to stronger
purchased parts, and also would better understand buyer performance. Supporting suppliers result
the weakness of the suppliers. Consequently, the in improved buyer-supplier performance
manufacturer will improve the quality of its (Humphreys et al., 2004) and enhanced
finished goods. Hence, both the manufacturer's product/service quality of the buying firm
31

(Krause et al., 2000). Some buyers provide enhance d supplier performance. These
training to managers and production employees improvements provide a competitive edge by
of their suppliers to improve the suppliers' enabling a buyer to increase its products/services
performance (Krause and Scannell, 2002; Modi sales (Hartley and Choi, 1996; Krause et al.,
and Mabert, 2007). 2000). The buyer providing direct assistance
It is not uncommon for buyers to teach their financially, improving the process design,
suppliers' employees quality improvement skills guiding to eliminate the waste, extending the
or educate them for waste management.(Krause, training efforts, regular plant visits have been
1997; Krause et al., 1998).The buyer may send its considered the ways of developing the supplier.
employees to the supplier's facility to offer This aspect of development also encourages
training or the buyer may invite the supplier to further the collaboration and co-dependency in
participate in training that is offered at its which both the parties extend support to each
facilities (Modi and Mabert, 2007). Thus visiting other to sustain and develop. Collaboration and
supplier's capacity can provide help to the co-dependency is achieved through strong
supplier in getting better ways of waste trusting relationships (Rogers 2006). Thus we
elimination and improving the process. The visits can say the dimensions of buyer supplier
by the buyer also encourage interaction and relationship are interdependent, focusing on one
liaison building between the two parties. The will lead to strengthening the others also leading
buyer becomes aware of the supplier and vice- to a strong buyer supplier relationship.
versa which is essential for relationship building Further studies can be done to compare these
and maintenance. dimensions in different industries with greater
When buyers help the suppliers not only for their number of respondents. The cases can be
own benefit in supply chain but also by taking into developed for better understanding of dyadic
consideration the overall enhancement of relationship and relationship quality issues.
business potential of the supplier then the References
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34 Bi-annual Journal of Asian School of Business Management, Vol. VI, Issue I, January 2013

Annexure:
Chart 1: Frequency distribution of Buyer organizations (N=150)

60

40

20

0
Chemical Electronics Auto Textile Construction Metal
Food
Processing

Series1 15 19 13 50 25 18 10

Table 1: Reliability values

Scale Cronbach's No. of


Alpha Items
Development .823 10
35

Table 2: Rotated Component Matrix- Development

Component
1 2 3 4
Dv1 .107 .861 .031 .029
Dv2 .196 .768 .220 .153
Dv3 .159 .140 .010 .959
Dv4 .167 .645 .180 .089
Dv5 .044
- .272 .874 .148
Dv6 .500 .080 .756 .197
Dv7 .797 .139 .249 .338
Dv8 .817 .256 .074 .025
Dv9 .776 .262 .119 .081
Dv10 .687 .512 .137 .009

Extraction Method: Principal Component Analysis.

Table 3: Regression Analysis


Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson


1 .926 .858 .854 .29357 1.8
36 Bi-annual Journal of Asian School of Business Management, Vol. VI, Issue I, January 2013
Table 4: ANOVA

Sum of
Model Squares df Mean Square F Sig.
1 Regression 75.697 4 18.924 219.594 .000

Residual 12.496 145 .086

Total 88.193 149

The model is significantly able to predict the outcome variable as the F-ration is high enough and thus
significant (p<.001).

Table 5: Coefficients

Unstandardized Coefficients Standardized Coefficients T Sig.

Model B Std. Error Beta B Std. Error


1 (Constant) .050 .089 .571 .569
F1 (7,8,9,10) .339 .028 .441 12.111 .000

F2 (1,2,4) .272 .026 .371 10.326 .000

.203 .025 .285 8.241 .000


F3(5,6)

F4(3) .125 .020 .209 6.405 .000


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