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Progress towards buyer-supplier partnerships
European Journal of Purchasing & Supply Management Vol. 2, No. 2/3, pp. 119-127, 1996 Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0969-7012196 $15.00 + 0.00
Pergamon 0969-7012(96)00001-9
Progress towards buyer-supplier partnerships Evidence from small and medium-sized manufacturing firms
Ram Mudambi and Claus Peter Schriinder School of Business, University of Buckingham, Buckingham MK18 lEG, UK There have been dramatic changes in the relationship between industrial buyers and suppliers over the past decade. Partnerships between larger buyers and suppliers are widely reported. The picture for small and medium-sized enterprises (SMEs) is less clear. In order to address this issue a mail survey of over 600 SMEs was carried out. The results suggest that the current level of partnership development is not high. However, they also indicate that there have been small but significant favourable changes in several factors underlying successful partnerships. This suggests that SMEs may be following, albeit with a lag of several years, the partnership sourcing methods being adopted by large firms. Copyright © 1996 Elsevier Science Ltd Keywords: purchasing, buyer-supplier partnerships, SMEs
Introduction Over the last decade, relationships between buyers and suppliers have undergone substantial changes. There has been a trend away from short-term contracting with numerous suppliers (arm's length relationships) and towards greater commitment with single sourcing and with longer-term contracts (partnerships, alliances, etc.). Galt and Dale (1991) found a trend towards single sourcing in the UK, while Bergman (1991) reported that, for example, Procter & Gamble has had considerable success in the implementation of such a strategy in the procurement of packaging materials, a major input. Helper (1991) found a trend towards a smaller supplier base and longer-term contracts in the US automobile industry.
Strategic importance of purchasing Application of strategic sourcing considerations has led to the subcontracting of numerous activities that were formerly performed in house (Venkatesan, 1992). These specialist suppliers are usually single sources. This trend is particularly noticeable in the area of services. Janitorial services are now routinely contracted out to firms such as ServiceMaster Inc., and
office services are available from firms like Roadway Services. Firms like BF Goodrich and the Rover Group contract out their warehousing and inventory management functions. Banks like Barnett Bank of Florida offer to take over accounts receivable and payroll functions. Much of the force behind these changes has come from observation of the success of Japanese management practices. Japanese companies frequently engage in 'partnership' buyer-supplier relationships, with buyers utilizing target pricing rather than competitive bidding (Landeros and Monczka, 1989), and with buyers utilizing fewer or even single suppliers for each key component. Partnership relationships involve the sharing of information on new product designs, international business plans, and long-term strategy that previously would have been closely guarded (Sheridan, 1990). For example, suppliers to Japanese automakers have been found to be much more involved in the early stages of new product development than are suppliers to US automakers (Cusumano and Takeishi, 1991). This new-style management, paired with a reduction in the number of suppliers, signifies a substantive change in the style of the buyer-supplier relationship. 119
R Mudambi and C P Schriinder The attention given to the Japanese model revived the teachings of W. Edwards Deming, who advised in the fourth of his points: End the practice of awarding business on the basis of a price tag. Instead, minimize total cost. Move toward a single supplier for any one item on a long-term relationship of loyalty and trust. (Deming, 1986)
Strategic importance of purchasing partnerships Developing partnership relationships allowed buyers to work closely with a few suppliers to improve specific areas of their performance, leading to savings in quality inspection costs, better integration of design efforts (Ellram and Cooper, 1990), and increased stability of supply. The new relationships also reflect the widening acceptance of just-in-time (JIT) manufacture and total quality control techniques (Turnbull et al, 1992). However, while companies in the West appear to be changing and moving toward more cooperative buyer-supplier relations, most of the literature has concentrated on the so-called 'champions', including Xerox (Sheridan, 1990), Procter & Gamble (Bergman, 1991), Rover (Turnbull et al, 1992), ICL and Laing Homes (Partnership Sourcing Limited, 1993), which overhauled their supplier systems in the 1980s. The question of how far such management practices have percolated down to small and medium-sized enterprises (SMEs) is unclear.
Strategic importance of SMEs for the economy SMEs, defined by the European Commission (1989) as companies with less than 500 employees, have a large and growing importance for the UK economy. Companies with less than 100 workers employ between 40% and 70% of the total work force, depending on the source (Anon, 1994). The share of SMEs rose from 57.3 to 71.3 of all employees in the private sector from 1979 to 1986 (Stanworth and Gray, 1991). The entrepreneurial, i.e. adaptive and innovative, nature of SMEs was highlighted when Lamming (1993) reported that the share of innovation in the computer industry contributed by SMEs had grown rapidly. The share of innovation in the UK had grown from 22.6% (1965--69) to 38.3% (1980--83). RothweU reported that the SME share of innovations in the computer industry grew from 36% in 1970-74 to 64% in 1980--83 (Rothwell, 1991). SMEs also offer a degree of flexibility in terms of production quantity and delivery that is unmatched by larger corporations. Companies like ABB (T50 programme) (Taylor, 1993), EDS and IBM (Peters, 1992) have tried to imitate smaller firms by creating small business units and giving them autonomy. Lamming (1993) emphasised that the importance of SMEs for technological advance is supported by some close networking between them. Partnering is found to be especially important in high-tech and fast-moving 120
industries. Small firms involved in technology-driven cooperation gained technological strength and skills through their industry association and their willingness to license and share their own technology (Bessant and Grunt, 1985). These horizontal alliances (networking) exist, and are reported to work well for an entire industry. However, the existence and success rates of vertical partnerships involving SMEs are less clear.
Conceptual framework From the above introduction three major strands of current thinking can be derived. First, the strategic importance of purchasing has been widely recognized, as purchased inputs now typically constitute 50-60% of output in manufacturing companies. The second strand relates to the recognition that SMEs are a vital part of the economy for both employment and innovation, while a third addresses the emergence of buyersupplier partnerships within the industrial purchasing arena. These issues are interrelated, and cannot be viewed in isolation. Further, they influence the way in which SMEs must organize their purchasing in order to survive in the future. These relationships are depicted in Figure 1. It is in this context that we assess quantitatively the current status of buyer-supplier relationships of UK SMEs in their role as buyers. We study the prevalence of a number of characteristics that are indicative of moves towards partnership relations. These will be developed from a more detailed look at the relevant literature. We utilize these indicators to answer three specific questions. First, we address the question of the extent to which supplier partnerships are taken up by SMEs. Second, we address the question of whether SMEs are a non-diverse group in terms of partnership development. Third, as an example of SME partnerships, we wish to assess the impact of the various indicators on buyer-supplier trust. This paper should therefore provide clear leads for SME-specific development of supplier partnerships. We find that the development of a basis for buyer-supplier partnerships is still at an early stage for
Frameworkfor Research on SME Buyer-Supplier
SUE \ Pro-
\
curementl Issues /
V Figure 1 Research framework
Status
of Relationships
Progress towards SME partnerships UK SME buyers. However, the movements over the last four years are all found to be in the direction of closer relations. This lends support to the hypothesis that UK SMEs are following the lead of the large 'champions' of buyer-supplier partnerships.
Selected literature The following short survey of related literature summarizes existing research concerning purchasing partnerships in SMEs. This discussion leads to the main thrust of our paper: the current status of buyer-supplier relationships in SMEs. Without a thorough understanding of the current status, successful implementation would seem to be virtually impossible. Overview of special issues of procurement partnerships in SMEs Of some 25 research papers relevant to our study, only five dealt specifically with SMEs. This fact makes comparative data collection difficult. The following paragraphs highlight some of the previous research and report its findings. General partnership literature. In a recent survey Imrie and Morris (1992) found that in the UK and the USA there are observable trends towards fewer, more talented suppliers. However, they also reported that informal relations between buyers and suppliers have not changed much. This view was shared by Helper (Helper, 1991), when she found no significant changes in the relationship between US automakers and their suppliers. While there has been an increase in formal buyer commitment among large automakers, informal commitment and trust remain low. However, there are significant exception. Nissan UK, for example, is already training some of its suppliers' staff in its 'partnership philosophy' (Tighe, 1992). In a similar vein Turnbull et al (1993) suggested that the UK automotive components industry is slowly moving towards fewer and larger suppliers in a tiered structure of component manufacturers based on mutual interdependence. This transition could have the effect that indigenous UK suppliers may adopt new relationship paradigms very quickly, while small suppliers might not be able to retain a 'preferred supplier' status and might therefore be dropped before any effective learning processes had been initiated. Partnership factors. One of the most prominent indicators for a move towards partnerships is the rationalization or consolidation of the supplier base (Matthyssens and Van den Bulte, 1994). These reductions have been reported mainly from large firms (Virag, 1994). In Just-in-Time production environments, the reduction of the number of suppliers is taken even further towards a single- or dual-sourcing strategy (St John and Heriot, 1993). This approach is not always without problems, especially in a setting different from the original Japanese environment. Single sourcing works effectively only in a win-win
scenario, which requires a cooperative approach to business. Spekman (1988) identified the potential risk of relying on a single partner for supplies. A higher degree of information about the supplier from both internal and external sources, as well as by guaranteed reliability, service and training, can reduce such risk. The reputation and dependability of a supplier and the buyer level of comfort are also important in assessing a partner. Munday (1992) emphasized that, in a partnership, buyers require a great deal of the cost data underlying component prices. The risk is that such cost data may be used to squeeze supplier profit margins. Instead, the buyer should provide detailed guidance for improvements in operations. Stuart (1993) reported that both top management commitment and purchasing capability are important in partnerships. Further, competitive priorities do not seem to influence the degree of partnerships, indicating that partnerships are applicable in a wide range of industrial settings. A University of Bath research project reported that traditional concerns, long-term considerations and mutual cooperation aspects are attributes of partnership sourcing in the UK (Cousins, 1992). Important features for partnerships include innovation, flexibility, technological ability and commerciality. For the most advanced partnerships, culture of and communication with the supplier are also relevant. Product quality is found to be one of the most important factors in the relationship between buyer and a small supplier (Baxter et al, 1989). SME suppliers have partially adopted a more quality-driven approach. However, often an adversarial and non-trust relationship based on price and contracts prevails. The assistance provided by buyers is therefore often illperceived. SME-specific issues. The SME-specific literature draws a relatively dim picture of the extent of and chances for SME partnership development. For example, Tan (1990) asserted that the demand for a shrinking supplier base requires that SMEs either improve or go under. SMEs were found to be weak in planning, finance, and technical skills. SMEs must develop those skills by adopting closer Supplier relationships. Large buyers can be of assistance in developing these partnerships. Batchelor et al (1994) presented results about inter-organizational learning. They found that the most likely scenario will be a 'senior-junior' relationship between large original equipment manufacturers and SMEs. Owing to the limited resources of SMEs, buyer assistance appears to have an adversarial flavour, hindering partnership development. Hankinson (1992) reported little development towards more cooperative buyer-supplier relationships from a sample of 11 firms with less than 200 employees. Only one of the investigated firms demonstrated an attempt to form a partnership. He 121
R Mudambi and C P Schriinder concluded that not all small firms are innovative and dynamic in terms of a partnership development. This view was shared by Rainnie (1991) when he reported that the buyer still dictates the terms on which purchasing contracts are given. He suggested that flexibility, innovation and quality demands from the buyer are difficult to achieve for small firms, and showed that the introduction of JIT production by manufacturing firms has been fragmentary. Further, in most cases the relationship between buyer and supplier is not cooperative and equal. SMEs' position in competing for the long-term contracts is therefore inferior, and as a result SMEs have to be content with what the larger suppliers leave for them. Again, no great advance for SMEs is observable. Summary Recently, Ramsey (1994) found that most subjects covered in the American and British purchasing journals are of no or limited relevance to small firms. He asserted that most research in the purchasing field benefits large, powerful corporations, who dominate the commercial scene anyway. The findings of those studies indeed seem to be from and for larger companies. We also find that most partnership-related studies target larger firms. The unequal distribution of power and differences in the availability of resources makes an easy transfer to small company settings almost impossible. However, all current research topics should be of interest to purchasing professionals in both SMEs and larger firms. The reviewed literature also reveals a trend towards closer, more cooperative relationships between buyers and suppliers. However, how many of these privileged positions are really available for small businesses remains unclear. This lack of empirical evidence from studies based on larger surveys about SMEs leads us to believe that a large-scale survey should provide helpful insights into SME supplier partnerships.
The study Little is known about the paradigm of supplier partnership implementation in SMEs, particularly when the buyer is a small firm. An essential precondition for developing such a paradigm is a clear understanding of the current status of SME buyer-supplier relations. In this paper we address this issue by taking the perspective of the small buyer. Research variables In order to approach the problem at hand, a set of variables to represent indicators of a tendency to partnership as a new paradigm in SME supply relationships were chosen. In this paper we concentrate on sophisticated and advanced measures of supplier partnerships. We shall discuss the measures used in the following paragraphs. 122
Literature suggests that a reduction in the number of suppliers and an increase in the number of key suppliers forms a prerequisite for a movement towards supplier partnerships. However, the rationalization of the supplier base is a rather early and crude indicator. Improved communication is widely mentioned as a means to improving supplier relationships of small as well as large firms. Communication may include visits of the supplier, and the coordinated development or improvement of products. Thus, we selected supplier site visits (SSV) and joint product design (JPD) as partnership indicators (PIs). Very advanced relationships in the supply chain use electronic data interchange (EDI) to communicate information about production schedules, stock levels, etc. EDI, as an indicator of technically advanced communication, requires substantial investments in hardware and software. Hence, for small firms, EDI is justified only in very close supplier relations. The existence of EDI relationships is therefore chosen as an indicator of SME partnerships. Longer trading relationships are a cornerstone of SME partnership development. Contract lengths may differ significantly from firm to firm, and are likely to be sensitive to the state of inter-firm relations. Therefore, we use long-term contracts (LTC) as a universal indicator of SME partnerships. On the operational side of supplier relationship improvement, the implementation of just-in-time (JIT) production systems requires improved supplier relations. Many large firms have adopted such manufacturing practices, and use JIT delivery as a supporting factor. Small firms, as their suppliers, should also have adopted JIT practices in their production and purchasing operations. Therefore, we use JIT delivery as a PI. Other more informal features of improved supplier relationships, such as trust and interpersonal relationships between buyer and supplier, management of partnerships, and the resolution of conflicts, are treated as qualitative measures. As these reflect qualitative measures they are difficult to operationalize. Additionally, they may be present whether supplier partnership exist or not, only differentiated by their contents, not by their existence. They are therefore not suitable in the quantitative assessment attempted in this research. Research questions The focus of analysis of the presented survey is the relationship that SMEs' buyers have with their suppliers. Quantitative measures regarding the structure of the supplier base are assessed at the preliminary stage. We are especially interested in quantitative measures associated with particular relationships. We seek to answer three specific questions: (1)
Has the usage of partnership indicators (PIs) changed over the last four years? The extent of such a change should give a clear sign as to whether any progress towards partnerships has been made.
Progress towards SME partnerships
(2) (3)
Has firm size a significant impact on the levels of adoption of partnership indicators? Literature suggests that partnering leads to a higher level of trust in partnerships. Therefore, we develop a proxy for trust and determine whether this hypothesis can be supported for SMEs by our sample data.
The questionnaire On the basis of the reviewed literature and expert interviews with practitioners a questionnaire was developed. This questionnaire was then pre-tested with five selected professionals to identify whether the questions would be understood and whether the answers would give the required information. The questionnaire required the respondent to supply numbers and observations; opinions were not solicited. The six sections contained open-ended as well as closed (tick-box) questions. The sections dealt with company ownership and size, product specifics, general and specific purchasing characteristics, the partnership indicators, and planned and implemented relationship improvement actions respectively. Finally, the respondents were asked to provide their names if they were interested in receiving a summary of the research. Central to the questionnaire was a matrix about existing supplier arrangements (the PIs). Specifically, we asked with how many of current suppliers the company had long-term contracts (LTC), joint product design (JPD), just-in-time delivery (JIT), electronic data interchange (EDI) and supplier site visits (SSV). The concept of partnership was not mentioned at this stage. All questions fit on a single sheet of A4 paper (printed on both sides) to ease handling and reduce the 'volume shock' for respondents. The entire questionnaire could be completed within 5-10 min depending on the availability of the required data. This ensured that even the 'busy' purchasing manager or managing director would fill it in.
The sample frame For the sample we selected small and medium-sized companies (82% had less than 100 employees) that manufactured products for the machine tool and engineering industry, but a fair number of subcontractors and precision engineers were also included. The addresses were cross-checked for accuracy with the Milton Keynes Borough Council (Economic Development Unit). The questionnaires were sent out in two waves during the period August/October 1994 to differentiate between the companies where the managing director or proprietor was known in advance and companies where no such information existed. Targeted areas were Milton Keynes, Northampton, Aylesbury and Luton in the south-east Midlands area of England.
Apart from minor modifications the same questionnaire was used in both waves. The questionnaire was accompanied by a cover letter explaining the study aims, guaranteeing confidentiality and urging response. In order to improve the response rate the questionnaire had to be short, concise and of current interest (salient) to the respondent (Heberlein and Baumgartner, 1978). One week later a reminder postcard was sent to those companies that had not returned the questionnaire.
Response rate, sample size A total of 621 questionnaires was ,posted, and the overall response rate was 25.1%. Of these 6.6% were not manufacturers. Valid responses represented 18.5% of the mailing. A further 3.0% were unusable for various other reasons, leaving 15.5% of the questionnaires for evaluation. The response rate is well within, even above, the range of those reported by related studies in the literature (see, for example, Lyons, 1994). The overall response rates to the mail questionnaires in the studies we reviewed in the previous section ranged from 15 to 40%. Some studies reported rates as low as 1% (Vastag and Whybark, 1994). The difficulties in approaching SMEs and the 'low cost' approach used are additional reasons for considering this response rate very good. Almost half of the respondents provided their name with the returned questionnaire, indicating a high degree of acceptance of the study.
Non-response bias Non-response bias was investigated using two separate approaches. First, we compared respondents in the first wave with respondents in the second wave. This is based on the argument that late respondents (in our case respondents where no contact name was available) are more like non-respondents than early respondents (in our case, respondents where a contact name was available) (Armstrong and Overton, 1977). Some 24 sample characteristics were compared using a ×z test of independence. The responses from the two waves were virtually identical. The second approach involved examining the richer first wave data set. In this case, we had some quantitative information about all firms in the sample frame (turnover and number of employees). We compared the profile of the responding firms with the profile of the entire sample frame. Our fear was that, owing to the nature of the study, more advanced firms in terms of partnering were over-represented in the received sample. However, no significant differences were found, indicating that the respondents were representative of the entire sample frame. The industry configuration of the original sample was also found to be represented very well in the received sample. Overall, we conclude that non-response bias is not a problem in our data set. 123
R Mudambi and C P Schrimder II IIII
I
i I
i iiiiiiiiiiiiiiiiii
IIIIIIIII
.Annual Turnover more than £5000k lees than £500k
40
£501 - £1000k 13%
Avemgeper.30 cantages 25
£1001 - £5000k 31%
Number of Employees more than 500 101 - 500 3%
Suppliers20 of covered 15 by PIs 10
5 0
~
FourYear Ago
.
.
.
LONG JOINT JUST-IN- E D I TERM PRODUCT TIME CONTRACTSDES;GN DELWERY
Change from 4 years ago: 43.7%
Figure 2 Annual turnover and number of employees of
I~:d::ard []
H
34.8% 6 3 , 6 %
385%
Dev ation SUPPLIER SITE VISITS 47.1%
Figure 4 Partnership indicators
sampled companies
Sample characteristics Seventy per cent of all respondents are stand-alone operations, with the others being either affiliates (sharing such activities as R & D) or divisions of larger corporations. Sixty per cent of all respondents have industrial customers or wholesalers, and only 13% deliver to retailers. This corresponds to the intended industrial SME orientation of the study. Figure 3 shows the composition of our sample. The classification used is based on the 1992 U K SIC (Standard Industrial Classification) codes. It may be seen that our sample represents a wide range of manufacturing industries.
Findings Pictographics Addressing the reduction of the supplier base as a prerequisite of partnerships, our analysis yielded ambiguous results. An overall consolidation of the supplier base is visible, but the rapid expansion of SMEs and their often very small supplier base reduce the significance of historic comparisons. The focus of this study is on the partnership indicators (PIs) of b u y e r - s u p p l i e r partnerships as defined in the previous section. The average
IIIIIIIIII Building
Glass PrUningand Reproduction Other ~ansport Equipment
Furniture/Games/ Toys IEnglnes /Machines/'rods [ContrOl~nd M~=,~=,J~,meltAp~;a,,~.~= 0
5
10 1~ % of Responding irms
Figure 3 Industry split of responding firms 124
20
25
percentages of suppliers covered by the PIs are depicted in Figure 4. It can be seen that the percentages for all PIs are increasing (34-63.6%). The levels of standard deviations are almost the same over the time period, indicating that comparing the average values is meaningful. These findings fit well with the p e r c e p t i o n of a slowly increasing partnership presence in large firms, but no clear signs for any advanced partnering can be observed yet. E D I is virtually non-existent, so it is not included in the statistical analysis p r e s e n t e d below. The only users of E D I found were the largest corporations in the sample. When considering the average percentages of the PIs, one has to bear in mind that some indicators are more difficult to implement with all suppliers than others. In this light, adoption levels of almost 40% of suppliers are remarkable. When we analyse the percentage of firms reporting any level of adoption of the PIs, we find a very similar picture.
Statistical analys& The pictographic presentation (Figure 4) gives a bird's eye view of the results obtained from the current study. In this section, the responses are analysed in more detail. We first analyse trends in the d e v e l o p m e n t of the indicators, and next investigate whether turnover has a significant impact on adoption levels of PIs. Last, we use external purchasing as a proxy for 'trust' in buyer-supplier relationships, and attempt to determine its association with the PIs.
Trends of partnership indicators. The first exercise carried out examines the trends in the partnership indicators over the recent past. In essence, this is a more detailed numerical analysis of the data presented in Figure 4. It is found that the increases in the adoption levels of partnership indicators are statistically significant in all cases except for JPD. Even here, the results are almost significant, as seen in Table 1. The increases are not dramatic, with the
Progress towards SME partnerships Table 1 Changes in partnership indicators, today and four years ago Average change of purchases covered b~ LTC J1T JPD SSV
%change 7.91 8.91 1.48 12.50
t Crit(5%, 2-tail) =1.9971 t(65) Statistic 3.43 3.17 1.45 4.51
largest increase recorded in the case of SSV, at 12.50 percentage points. Thus we have evidence of a slow but wide-ranging increase in the precursors to partnerships. Overall, we can conclude that SMEs have made clear progress towards buyer-supplier partnerships, and therefore answer our research question (1) in the affirmative.
Turnover related to partnership indicators. For the purpose of classification, medium-sized firms are defined as those with a turnover exceeding £5 million and small firms as those with a turnover lower than this figure. As seen in Table 2, there appears to be no significant difference between small and medium firms, either today or four years ago, in terms of the level of JIT and JPD arrangements. However, medium-sized firms have a significantly higher level of SSVs, both now and four years ago. Indeed, the divergence between small and mediumsized firms in this area seems to have increased over this period. Finally, turnover has a significant impact on LTC. Both today and four years ago, mediumsized firms show a significantly higher percentage of inputs covered by LTCs than do small firms. In this area, the divergence between the two appears to be growing. Thus, answering our question (2), we can observe that larger firms do move faster towards a partnership paradigm. The earlier reported widespread move towards partnerships in SMEs appears to be significantly stronger in the larger ones. Delivered lot sizes (in terms of 'number of days of input requirement') are also f o u n d to vary insignificantly between small and medium-sized firms. This result seems to support the result for JIT deliveries mentioned above. Table 2 Turnover related to partnership indicators, today and four years ago Differences between medium and small firms in % of purchases covered by LTC JIT JPD SSV
t Crit (5%, one-tail) = 1.669 t(64) Statistics
External purchasing related to partnership indicators. It is hypothesized that advances in partnerships, as measured by the indicators, lead to a greater propensity to outsource work that does not form part of a firm's 'core competencies'. The level of external input as a percentage of turnover (EIT) may then be considered a causal outcome of the level of partnership indicators. It may be argued that E I T is a tangible representation of trust and informal commitments in the buyer-supplier relationship. In sum, E I T is used as proxy for trust. This hypothesis is tested using multiple regression analysis. The dependent variable, EIT, obviously lies between 0 and 100. It is found that the data set contains several boundary data points, ie with values of 0 or 100. This means that the data are censored, and that the ordinary least squares (OLS) estimators, which do not take the restrictions on the value of E I T into account, are biased and have inflated variances. To correct for this problem, the Tobit (non-linear) estimation procedure is used. The Tobit estimation converted in four iterations. Both OLS and Tobit estimators are presented in Table 3. The improvements in the log-likelihood and the reduction in the estimated standard error by using Tobit are documented. SSV is found to exhibit a significant positive correlation with JPD. To correct the induced multicollinearity, SSV is filtered through JPD and the orthogonal residuals [SSV(f)] are used as regressors. This removes the downward bias in the t-statistics. Both L T C and JPD are found to have a significant positive effect on EIT, while neither JIT nor SSV does. Quantitatively, a 10% increase in the percentage of inputs that are subject to L T C is estimated to increase E I T by 2.1%, while a similar increase in the percentage of inputs under JPD is estimated to lead to a 3.4% increase in EIT. Answering question (3) we can observe that L T C and J P D seem to foster trust in the buyer-supplier relationship, while JIT and SSV do not.
Table 3 Relative external purchases related to partnership indicators, filtered OLS and Tobit regression results Dependent variable: EIT Regressor OLS coefficient
t Ratio
Tobit coefficient
t Ratio
Intercept LTC JIT JPD SSV(f)
9.66 2.01 1.28 3.70 0.83
45.80 0.21 -0.21 0.34 -0.69
10.04 2.36 1.34 3.83 0.87
Today
Four years ago
Diagnostics:
3.42 0.31 1.57 3.65
2.40 1.15 0.48 2.44
Log-likelihood SE (EIT) F(4,61) Adj. R2
45.78 0.19 -0.21 0.34 -0.08
-320.01 23.71 5.39 0.41
-299.90 22.81
125
R Mudambi and C P Schriinder
Conclusions There has been relatively little research on partnerships in SMEs. What literature there is tends to concentrate on SMEs as suppliers to large corporations rather than as buyers. The objective of this paper, namely the examination of partnerships of SME buyers, is therefore quite novel. We find that the actual prevalence of partnership indicators in SMEs is still relatively low. Further, the last four years have witnessed only small changes. However, all changes have been favourable to the implementation of buyer-supplier partnerships. The changes have occurred across a broad spectrum of partnership indicators, and while small, virtually all of them are statistically significant. Overall, we are able to conclude that UK SME buyers are making slow but broad-ranging moves in the direction of implementing supplier partnerships. In this sense the proposed largefirm partnership paradigm appears to be applicable in SMEs too. When we examine firms by size as measured by turnover, we find that larger SMEs carry out more supplier site visits. We also find that they cover a greater percentage of their inputs through long-term contracts. However, in other dimensions, we find that size does not seem to matter. Finally, we attempt to quantify the relationship between formal partnership indicators and the more informal aspects of the buyer-supplier relationship. We proxy the trust in the buyer-supplier relationship by purchased inputs as percentage of turnover. We find that only long-term contracts and joint product development seem to foster trust significantly in SME manufacturers. The results presented were obtained from a sample in England; nevertheless, we are certain that the results are transferable to other geographical settings. However, the results cannot be generalized beyond SME manufacturers. Our sample is fairly representative of the UK manufacturing in the SME sector (see Figure 3). Further, we specifically chose geographic areas for maximum diversity, including new industrial areas (Milton Keynes, a New Town) as well as more traditional parts of the UK industrial heartland (Luton, Northampton and Aylesbury). There is literature indicating that there may even be some transferability of the results across the Atlantic (Vastag and Whybark, 1994). SMEs seem to be following the lead of the large firms in the area of partnership development. However, we have provided some evidence for two interesting insights. First, SMEs are not a monolithic group in the area of partnering. Firm size has different effects on the adoption rates of partnership indicators. Second, different formal partnership indicators have differing impacts on the informal aspects of the buyer-supplier relationship and consequently on the 126
trust that exists between the parties. The second insight in particular may provide some guidance to SMEs in their attempts to implement partnerships. Benefits reaped from partnerships are not exclusive to large companies. However, at this stage, the larger companies, frequently the customers of 'our' SMEs, are of vital importance. By encouraging partnerships, not only with their direct suppliers, but with their suppliers' suppliers, the benefits of this manner of conducting business can be enjoyed by the entire value chain. An extension of the current study to the role of SMEs in such 'extended' partnerships in the value chain would be a useful direction for further research.
Acknowledgements We would like to acknowledge a research grant from the University of Buckingham and project support from the Milton Keynes Borough Council and the Chartered Institute of Purchasing and Supply (CIPS). We would like to thank the participants at the 4th IPSERA Conference in Birmingham. The views expressed here are not necessarily attributable to any of these institutions. Both authors have equally contributed to the work. Each blames the other for remaining errors.
References Anon (1994) 'Belittled' Economist 332(7873) 74 Armstrong, J S and Overton, T (1977) 'Estimating nonresponse bias in mail surveys' Journal of Marketing Research 51(7) 71-86 Batchelor, J, Donelly, T and Morris, D (1994) 'A lean future for SME suppliers and sub-contractors?' IPSERA- 3rd International Annual Conference Glamorgan, March Baxter, L F, Ferguson, N, Macbeth, D K and Neil G (1989) 'Getting the message across? Supplier quality improvement programmes: some issues in practice' International Journal of Operations and Production Management 9(5) 69-76 Bergman, S (1991) 'Reverse Marketing in 1991' NAPM Insights 26-27 Bessant, J R and Grunt, M. (1985) Management and Manufacturing Innovation in the United Kingdom and West Germany Gower. Aldershot, UK Cousins, P D (1992) 'Choosing the right partner' Purchasing and Supply Management 21-23. Cusumano, M A and Takeishi, A (1991) 'Supplier relations and management: a survey of Japanese, Japanese-transplant, and US auto plants' Strategic Management Journal 12 563-588 Deming, W E (1986) Out of the Crisis MIT Center for Advanced Engineering Study, Cambridge, MA Ellram, L M and Cooper, M C (1990) 'Supply chain management partnerships, and the shipper-third party relationship' International Journal of Logistics Management 1(2) 1-19 European Commission (1989) Com 90 528 Final, 18.12.89 Gait, J D A and Dale, B G (1991) 'Supplier development: a British case study' International Journal of Purchasing and Materials Management 27(1) 16-22 Hankinson, A (1992) 'Small firms: purchasing and supply relationships' Purchasing and Supply Management 38-39 Heberlein, T A and Baumgartner, R (1978) 'Factors affecting response rates to mailed questionnaires: a quantitative analysis of the published literature' American Sociological Review 43(4) 447--462. Helper, S (1991) 'How much has really changed between US autq~aakers and their suppliers' Sloan Management Review 15 15-28 Imrie, R and Morris, J (1992) 'A review of recent changes in buyer-supplier relations' Omega 20(5/6) 641-652
Progress towards S M E partnerships Lamming, R (1993) Beyond Partnership: Strategies for Innovation and Supply Prentice-Hall International, UK Landeros, R and Monczka, R M (1989) 'Cooperative buyer/seller relationships and a firm's competitive posture' Journal of Purchasing and Materials Management 25(3) 9-18. Lyons, B R (1994) 'Contracts and specific investment: an empirical test of transaction cost theory' Journal of Economics and Management Strategy 3(2) 257-278 Matthyssens, P and Van den Bulte, C (1994) 'Getting closer and nicer: partnerships in the supply chain' Long Range Planning 27 (1) 72-83 Munday, M (1992) 'Buyer-supplier partnerships and cost data disclosure' Management Accounting, London 70(6) 28, 35 Partnership Sourcing Limited (1992) Partnership Sourcing DTI/CB! Peters, T (1992) Liberation Management Macmillan. London Rainnie, A. (1991) ',lust-in-time, sub-contracting and the smaller firm' Work, Employment & Society (UK) 5(3) 353-375 Ramsey, J (1994) 'The forgotten majority: academia and the small buyer' IPSERA - 3rd International Annual Conference Glamorgan Rothwell R (1991) 'External networking and innovation in small and medium-sized manufacturing firms in Europe' Technovation 11(2) 93-112 Sheridan, J H (1990) 'Suppliers: partners in prosperity' Industry Week 239(6) 12-19 Spekman, R E (1988) 'Perceptions of strategic vulnerability among industrial buyers and its effect on information search and supplier evaluation' Journal of Business Research 17(4) 313-326 St John, C H and Heriot, K C (1993) 'Small suppliers and .liT purchasing' International Journal of Purchasing and Materials Management (USA) 29(1) 11-16
Stanworth, ,l and Gray, C (1991) 'Bolton 20 Years on: The Small Firm in the 1990s' in Paul Chaplan Publishing Stuart, J F (1993) 'Supplier partnerships: influencing factors and strategic benefits' International Journal of Purchasing and Materials Management 22-28 Tan, B W (1990) 'Using the supplier relationship to develop the support industry' Omega 18 151-158 Taylor, R (1993) 'Management: resetting the clock-Asea Brown Boveri is transforming its factories by slashing lead times' Financial Times 10 February Tighe, C (1992) 'Nissan links with its suppliers' suppliers' Financial Times 14 December 8. Turnbull, P, Delbridge, R, Oliver, N and Wilkinson, B (1993) 'Winners and losers - The "Tiering" of component suppliers in the UK automotive industry' Journal of General Management 19(1) 48-63 Turnbull, P, Oliver, N and Wilkinson, B (1992) 'Buyer-supplier relations in the UK automotive industry: strategic implications of the Japanese manufacturing model' Strategic Management Journal 13 159-168 Vastag, G and Whybark, D C (1994) 'American and European manufacturing practices: an analytical framework and comparisons' Journal of Operations Management 12(1) 1-11 Venkatesan, R (1992) 'Strategic sourcing: to make or not to make' Harvard Business Review 70(6) 98-107 Virag, D (1994) Supplier Survival into the 21st Century: A Strategic Analysis of Emerging Supplier Issues Kensington Publications Ltd in conjunction with The International Symposium on Automotive Technology and Automation (ISATA), London
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Pergamon 0969-7012(96)00001-9
Progress towards buyer-supplier partnerships Evidence from small and medium-sized manufacturing firms
Ram Mudambi and Claus Peter Schriinder School of Business, University of Buckingham, Buckingham MK18 lEG, UK There have been dramatic changes in the relationship between industrial buyers and suppliers over the past decade. Partnerships between larger buyers and suppliers are widely reported. The picture for small and medium-sized enterprises (SMEs) is less clear. In order to address this issue a mail survey of over 600 SMEs was carried out. The results suggest that the current level of partnership development is not high. However, they also indicate that there have been small but significant favourable changes in several factors underlying successful partnerships. This suggests that SMEs may be following, albeit with a lag of several years, the partnership sourcing methods being adopted by large firms. Copyright © 1996 Elsevier Science Ltd Keywords: purchasing, buyer-supplier partnerships, SMEs
Introduction Over the last decade, relationships between buyers and suppliers have undergone substantial changes. There has been a trend away from short-term contracting with numerous suppliers (arm's length relationships) and towards greater commitment with single sourcing and with longer-term contracts (partnerships, alliances, etc.). Galt and Dale (1991) found a trend towards single sourcing in the UK, while Bergman (1991) reported that, for example, Procter & Gamble has had considerable success in the implementation of such a strategy in the procurement of packaging materials, a major input. Helper (1991) found a trend towards a smaller supplier base and longer-term contracts in the US automobile industry.
Strategic importance of purchasing Application of strategic sourcing considerations has led to the subcontracting of numerous activities that were formerly performed in house (Venkatesan, 1992). These specialist suppliers are usually single sources. This trend is particularly noticeable in the area of services. Janitorial services are now routinely contracted out to firms such as ServiceMaster Inc., and
office services are available from firms like Roadway Services. Firms like BF Goodrich and the Rover Group contract out their warehousing and inventory management functions. Banks like Barnett Bank of Florida offer to take over accounts receivable and payroll functions. Much of the force behind these changes has come from observation of the success of Japanese management practices. Japanese companies frequently engage in 'partnership' buyer-supplier relationships, with buyers utilizing target pricing rather than competitive bidding (Landeros and Monczka, 1989), and with buyers utilizing fewer or even single suppliers for each key component. Partnership relationships involve the sharing of information on new product designs, international business plans, and long-term strategy that previously would have been closely guarded (Sheridan, 1990). For example, suppliers to Japanese automakers have been found to be much more involved in the early stages of new product development than are suppliers to US automakers (Cusumano and Takeishi, 1991). This new-style management, paired with a reduction in the number of suppliers, signifies a substantive change in the style of the buyer-supplier relationship. 119
R Mudambi and C P Schriinder The attention given to the Japanese model revived the teachings of W. Edwards Deming, who advised in the fourth of his points: End the practice of awarding business on the basis of a price tag. Instead, minimize total cost. Move toward a single supplier for any one item on a long-term relationship of loyalty and trust. (Deming, 1986)
Strategic importance of purchasing partnerships Developing partnership relationships allowed buyers to work closely with a few suppliers to improve specific areas of their performance, leading to savings in quality inspection costs, better integration of design efforts (Ellram and Cooper, 1990), and increased stability of supply. The new relationships also reflect the widening acceptance of just-in-time (JIT) manufacture and total quality control techniques (Turnbull et al, 1992). However, while companies in the West appear to be changing and moving toward more cooperative buyer-supplier relations, most of the literature has concentrated on the so-called 'champions', including Xerox (Sheridan, 1990), Procter & Gamble (Bergman, 1991), Rover (Turnbull et al, 1992), ICL and Laing Homes (Partnership Sourcing Limited, 1993), which overhauled their supplier systems in the 1980s. The question of how far such management practices have percolated down to small and medium-sized enterprises (SMEs) is unclear.
Strategic importance of SMEs for the economy SMEs, defined by the European Commission (1989) as companies with less than 500 employees, have a large and growing importance for the UK economy. Companies with less than 100 workers employ between 40% and 70% of the total work force, depending on the source (Anon, 1994). The share of SMEs rose from 57.3 to 71.3 of all employees in the private sector from 1979 to 1986 (Stanworth and Gray, 1991). The entrepreneurial, i.e. adaptive and innovative, nature of SMEs was highlighted when Lamming (1993) reported that the share of innovation in the computer industry contributed by SMEs had grown rapidly. The share of innovation in the UK had grown from 22.6% (1965--69) to 38.3% (1980--83). RothweU reported that the SME share of innovations in the computer industry grew from 36% in 1970-74 to 64% in 1980--83 (Rothwell, 1991). SMEs also offer a degree of flexibility in terms of production quantity and delivery that is unmatched by larger corporations. Companies like ABB (T50 programme) (Taylor, 1993), EDS and IBM (Peters, 1992) have tried to imitate smaller firms by creating small business units and giving them autonomy. Lamming (1993) emphasised that the importance of SMEs for technological advance is supported by some close networking between them. Partnering is found to be especially important in high-tech and fast-moving 120
industries. Small firms involved in technology-driven cooperation gained technological strength and skills through their industry association and their willingness to license and share their own technology (Bessant and Grunt, 1985). These horizontal alliances (networking) exist, and are reported to work well for an entire industry. However, the existence and success rates of vertical partnerships involving SMEs are less clear.
Conceptual framework From the above introduction three major strands of current thinking can be derived. First, the strategic importance of purchasing has been widely recognized, as purchased inputs now typically constitute 50-60% of output in manufacturing companies. The second strand relates to the recognition that SMEs are a vital part of the economy for both employment and innovation, while a third addresses the emergence of buyersupplier partnerships within the industrial purchasing arena. These issues are interrelated, and cannot be viewed in isolation. Further, they influence the way in which SMEs must organize their purchasing in order to survive in the future. These relationships are depicted in Figure 1. It is in this context that we assess quantitatively the current status of buyer-supplier relationships of UK SMEs in their role as buyers. We study the prevalence of a number of characteristics that are indicative of moves towards partnership relations. These will be developed from a more detailed look at the relevant literature. We utilize these indicators to answer three specific questions. First, we address the question of the extent to which supplier partnerships are taken up by SMEs. Second, we address the question of whether SMEs are a non-diverse group in terms of partnership development. Third, as an example of SME partnerships, we wish to assess the impact of the various indicators on buyer-supplier trust. This paper should therefore provide clear leads for SME-specific development of supplier partnerships. We find that the development of a basis for buyer-supplier partnerships is still at an early stage for
Frameworkfor Research on SME Buyer-Supplier
SUE \ Pro-
\
curementl Issues /
V Figure 1 Research framework
Status
of Relationships
Progress towards SME partnerships UK SME buyers. However, the movements over the last four years are all found to be in the direction of closer relations. This lends support to the hypothesis that UK SMEs are following the lead of the large 'champions' of buyer-supplier partnerships.
Selected literature The following short survey of related literature summarizes existing research concerning purchasing partnerships in SMEs. This discussion leads to the main thrust of our paper: the current status of buyer-supplier relationships in SMEs. Without a thorough understanding of the current status, successful implementation would seem to be virtually impossible. Overview of special issues of procurement partnerships in SMEs Of some 25 research papers relevant to our study, only five dealt specifically with SMEs. This fact makes comparative data collection difficult. The following paragraphs highlight some of the previous research and report its findings. General partnership literature. In a recent survey Imrie and Morris (1992) found that in the UK and the USA there are observable trends towards fewer, more talented suppliers. However, they also reported that informal relations between buyers and suppliers have not changed much. This view was shared by Helper (Helper, 1991), when she found no significant changes in the relationship between US automakers and their suppliers. While there has been an increase in formal buyer commitment among large automakers, informal commitment and trust remain low. However, there are significant exception. Nissan UK, for example, is already training some of its suppliers' staff in its 'partnership philosophy' (Tighe, 1992). In a similar vein Turnbull et al (1993) suggested that the UK automotive components industry is slowly moving towards fewer and larger suppliers in a tiered structure of component manufacturers based on mutual interdependence. This transition could have the effect that indigenous UK suppliers may adopt new relationship paradigms very quickly, while small suppliers might not be able to retain a 'preferred supplier' status and might therefore be dropped before any effective learning processes had been initiated. Partnership factors. One of the most prominent indicators for a move towards partnerships is the rationalization or consolidation of the supplier base (Matthyssens and Van den Bulte, 1994). These reductions have been reported mainly from large firms (Virag, 1994). In Just-in-Time production environments, the reduction of the number of suppliers is taken even further towards a single- or dual-sourcing strategy (St John and Heriot, 1993). This approach is not always without problems, especially in a setting different from the original Japanese environment. Single sourcing works effectively only in a win-win
scenario, which requires a cooperative approach to business. Spekman (1988) identified the potential risk of relying on a single partner for supplies. A higher degree of information about the supplier from both internal and external sources, as well as by guaranteed reliability, service and training, can reduce such risk. The reputation and dependability of a supplier and the buyer level of comfort are also important in assessing a partner. Munday (1992) emphasized that, in a partnership, buyers require a great deal of the cost data underlying component prices. The risk is that such cost data may be used to squeeze supplier profit margins. Instead, the buyer should provide detailed guidance for improvements in operations. Stuart (1993) reported that both top management commitment and purchasing capability are important in partnerships. Further, competitive priorities do not seem to influence the degree of partnerships, indicating that partnerships are applicable in a wide range of industrial settings. A University of Bath research project reported that traditional concerns, long-term considerations and mutual cooperation aspects are attributes of partnership sourcing in the UK (Cousins, 1992). Important features for partnerships include innovation, flexibility, technological ability and commerciality. For the most advanced partnerships, culture of and communication with the supplier are also relevant. Product quality is found to be one of the most important factors in the relationship between buyer and a small supplier (Baxter et al, 1989). SME suppliers have partially adopted a more quality-driven approach. However, often an adversarial and non-trust relationship based on price and contracts prevails. The assistance provided by buyers is therefore often illperceived. SME-specific issues. The SME-specific literature draws a relatively dim picture of the extent of and chances for SME partnership development. For example, Tan (1990) asserted that the demand for a shrinking supplier base requires that SMEs either improve or go under. SMEs were found to be weak in planning, finance, and technical skills. SMEs must develop those skills by adopting closer Supplier relationships. Large buyers can be of assistance in developing these partnerships. Batchelor et al (1994) presented results about inter-organizational learning. They found that the most likely scenario will be a 'senior-junior' relationship between large original equipment manufacturers and SMEs. Owing to the limited resources of SMEs, buyer assistance appears to have an adversarial flavour, hindering partnership development. Hankinson (1992) reported little development towards more cooperative buyer-supplier relationships from a sample of 11 firms with less than 200 employees. Only one of the investigated firms demonstrated an attempt to form a partnership. He 121
R Mudambi and C P Schriinder concluded that not all small firms are innovative and dynamic in terms of a partnership development. This view was shared by Rainnie (1991) when he reported that the buyer still dictates the terms on which purchasing contracts are given. He suggested that flexibility, innovation and quality demands from the buyer are difficult to achieve for small firms, and showed that the introduction of JIT production by manufacturing firms has been fragmentary. Further, in most cases the relationship between buyer and supplier is not cooperative and equal. SMEs' position in competing for the long-term contracts is therefore inferior, and as a result SMEs have to be content with what the larger suppliers leave for them. Again, no great advance for SMEs is observable. Summary Recently, Ramsey (1994) found that most subjects covered in the American and British purchasing journals are of no or limited relevance to small firms. He asserted that most research in the purchasing field benefits large, powerful corporations, who dominate the commercial scene anyway. The findings of those studies indeed seem to be from and for larger companies. We also find that most partnership-related studies target larger firms. The unequal distribution of power and differences in the availability of resources makes an easy transfer to small company settings almost impossible. However, all current research topics should be of interest to purchasing professionals in both SMEs and larger firms. The reviewed literature also reveals a trend towards closer, more cooperative relationships between buyers and suppliers. However, how many of these privileged positions are really available for small businesses remains unclear. This lack of empirical evidence from studies based on larger surveys about SMEs leads us to believe that a large-scale survey should provide helpful insights into SME supplier partnerships.
The study Little is known about the paradigm of supplier partnership implementation in SMEs, particularly when the buyer is a small firm. An essential precondition for developing such a paradigm is a clear understanding of the current status of SME buyer-supplier relations. In this paper we address this issue by taking the perspective of the small buyer. Research variables In order to approach the problem at hand, a set of variables to represent indicators of a tendency to partnership as a new paradigm in SME supply relationships were chosen. In this paper we concentrate on sophisticated and advanced measures of supplier partnerships. We shall discuss the measures used in the following paragraphs. 122
Literature suggests that a reduction in the number of suppliers and an increase in the number of key suppliers forms a prerequisite for a movement towards supplier partnerships. However, the rationalization of the supplier base is a rather early and crude indicator. Improved communication is widely mentioned as a means to improving supplier relationships of small as well as large firms. Communication may include visits of the supplier, and the coordinated development or improvement of products. Thus, we selected supplier site visits (SSV) and joint product design (JPD) as partnership indicators (PIs). Very advanced relationships in the supply chain use electronic data interchange (EDI) to communicate information about production schedules, stock levels, etc. EDI, as an indicator of technically advanced communication, requires substantial investments in hardware and software. Hence, for small firms, EDI is justified only in very close supplier relations. The existence of EDI relationships is therefore chosen as an indicator of SME partnerships. Longer trading relationships are a cornerstone of SME partnership development. Contract lengths may differ significantly from firm to firm, and are likely to be sensitive to the state of inter-firm relations. Therefore, we use long-term contracts (LTC) as a universal indicator of SME partnerships. On the operational side of supplier relationship improvement, the implementation of just-in-time (JIT) production systems requires improved supplier relations. Many large firms have adopted such manufacturing practices, and use JIT delivery as a supporting factor. Small firms, as their suppliers, should also have adopted JIT practices in their production and purchasing operations. Therefore, we use JIT delivery as a PI. Other more informal features of improved supplier relationships, such as trust and interpersonal relationships between buyer and supplier, management of partnerships, and the resolution of conflicts, are treated as qualitative measures. As these reflect qualitative measures they are difficult to operationalize. Additionally, they may be present whether supplier partnership exist or not, only differentiated by their contents, not by their existence. They are therefore not suitable in the quantitative assessment attempted in this research. Research questions The focus of analysis of the presented survey is the relationship that SMEs' buyers have with their suppliers. Quantitative measures regarding the structure of the supplier base are assessed at the preliminary stage. We are especially interested in quantitative measures associated with particular relationships. We seek to answer three specific questions: (1)
Has the usage of partnership indicators (PIs) changed over the last four years? The extent of such a change should give a clear sign as to whether any progress towards partnerships has been made.
Progress towards SME partnerships
(2) (3)
Has firm size a significant impact on the levels of adoption of partnership indicators? Literature suggests that partnering leads to a higher level of trust in partnerships. Therefore, we develop a proxy for trust and determine whether this hypothesis can be supported for SMEs by our sample data.
The questionnaire On the basis of the reviewed literature and expert interviews with practitioners a questionnaire was developed. This questionnaire was then pre-tested with five selected professionals to identify whether the questions would be understood and whether the answers would give the required information. The questionnaire required the respondent to supply numbers and observations; opinions were not solicited. The six sections contained open-ended as well as closed (tick-box) questions. The sections dealt with company ownership and size, product specifics, general and specific purchasing characteristics, the partnership indicators, and planned and implemented relationship improvement actions respectively. Finally, the respondents were asked to provide their names if they were interested in receiving a summary of the research. Central to the questionnaire was a matrix about existing supplier arrangements (the PIs). Specifically, we asked with how many of current suppliers the company had long-term contracts (LTC), joint product design (JPD), just-in-time delivery (JIT), electronic data interchange (EDI) and supplier site visits (SSV). The concept of partnership was not mentioned at this stage. All questions fit on a single sheet of A4 paper (printed on both sides) to ease handling and reduce the 'volume shock' for respondents. The entire questionnaire could be completed within 5-10 min depending on the availability of the required data. This ensured that even the 'busy' purchasing manager or managing director would fill it in.
The sample frame For the sample we selected small and medium-sized companies (82% had less than 100 employees) that manufactured products for the machine tool and engineering industry, but a fair number of subcontractors and precision engineers were also included. The addresses were cross-checked for accuracy with the Milton Keynes Borough Council (Economic Development Unit). The questionnaires were sent out in two waves during the period August/October 1994 to differentiate between the companies where the managing director or proprietor was known in advance and companies where no such information existed. Targeted areas were Milton Keynes, Northampton, Aylesbury and Luton in the south-east Midlands area of England.
Apart from minor modifications the same questionnaire was used in both waves. The questionnaire was accompanied by a cover letter explaining the study aims, guaranteeing confidentiality and urging response. In order to improve the response rate the questionnaire had to be short, concise and of current interest (salient) to the respondent (Heberlein and Baumgartner, 1978). One week later a reminder postcard was sent to those companies that had not returned the questionnaire.
Response rate, sample size A total of 621 questionnaires was ,posted, and the overall response rate was 25.1%. Of these 6.6% were not manufacturers. Valid responses represented 18.5% of the mailing. A further 3.0% were unusable for various other reasons, leaving 15.5% of the questionnaires for evaluation. The response rate is well within, even above, the range of those reported by related studies in the literature (see, for example, Lyons, 1994). The overall response rates to the mail questionnaires in the studies we reviewed in the previous section ranged from 15 to 40%. Some studies reported rates as low as 1% (Vastag and Whybark, 1994). The difficulties in approaching SMEs and the 'low cost' approach used are additional reasons for considering this response rate very good. Almost half of the respondents provided their name with the returned questionnaire, indicating a high degree of acceptance of the study.
Non-response bias Non-response bias was investigated using two separate approaches. First, we compared respondents in the first wave with respondents in the second wave. This is based on the argument that late respondents (in our case respondents where no contact name was available) are more like non-respondents than early respondents (in our case, respondents where a contact name was available) (Armstrong and Overton, 1977). Some 24 sample characteristics were compared using a ×z test of independence. The responses from the two waves were virtually identical. The second approach involved examining the richer first wave data set. In this case, we had some quantitative information about all firms in the sample frame (turnover and number of employees). We compared the profile of the responding firms with the profile of the entire sample frame. Our fear was that, owing to the nature of the study, more advanced firms in terms of partnering were over-represented in the received sample. However, no significant differences were found, indicating that the respondents were representative of the entire sample frame. The industry configuration of the original sample was also found to be represented very well in the received sample. Overall, we conclude that non-response bias is not a problem in our data set. 123
R Mudambi and C P Schrimder II IIII
I
i I
i iiiiiiiiiiiiiiiiii
IIIIIIIII
.Annual Turnover more than £5000k lees than £500k
40
£501 - £1000k 13%
Avemgeper.30 cantages 25
£1001 - £5000k 31%
Number of Employees more than 500 101 - 500 3%
Suppliers20 of covered 15 by PIs 10
5 0
~
FourYear Ago
.
.
.
LONG JOINT JUST-IN- E D I TERM PRODUCT TIME CONTRACTSDES;GN DELWERY
Change from 4 years ago: 43.7%
Figure 2 Annual turnover and number of employees of
I~:d::ard []
H
34.8% 6 3 , 6 %
385%
Dev ation SUPPLIER SITE VISITS 47.1%
Figure 4 Partnership indicators
sampled companies
Sample characteristics Seventy per cent of all respondents are stand-alone operations, with the others being either affiliates (sharing such activities as R & D) or divisions of larger corporations. Sixty per cent of all respondents have industrial customers or wholesalers, and only 13% deliver to retailers. This corresponds to the intended industrial SME orientation of the study. Figure 3 shows the composition of our sample. The classification used is based on the 1992 U K SIC (Standard Industrial Classification) codes. It may be seen that our sample represents a wide range of manufacturing industries.
Findings Pictographics Addressing the reduction of the supplier base as a prerequisite of partnerships, our analysis yielded ambiguous results. An overall consolidation of the supplier base is visible, but the rapid expansion of SMEs and their often very small supplier base reduce the significance of historic comparisons. The focus of this study is on the partnership indicators (PIs) of b u y e r - s u p p l i e r partnerships as defined in the previous section. The average
IIIIIIIIII Building
Glass PrUningand Reproduction Other ~ansport Equipment
Furniture/Games/ Toys IEnglnes /Machines/'rods [ContrOl~nd M~=,~=,J~,meltAp~;a,,~.~= 0
5
10 1~ % of Responding irms
Figure 3 Industry split of responding firms 124
20
25
percentages of suppliers covered by the PIs are depicted in Figure 4. It can be seen that the percentages for all PIs are increasing (34-63.6%). The levels of standard deviations are almost the same over the time period, indicating that comparing the average values is meaningful. These findings fit well with the p e r c e p t i o n of a slowly increasing partnership presence in large firms, but no clear signs for any advanced partnering can be observed yet. E D I is virtually non-existent, so it is not included in the statistical analysis p r e s e n t e d below. The only users of E D I found were the largest corporations in the sample. When considering the average percentages of the PIs, one has to bear in mind that some indicators are more difficult to implement with all suppliers than others. In this light, adoption levels of almost 40% of suppliers are remarkable. When we analyse the percentage of firms reporting any level of adoption of the PIs, we find a very similar picture.
Statistical analys& The pictographic presentation (Figure 4) gives a bird's eye view of the results obtained from the current study. In this section, the responses are analysed in more detail. We first analyse trends in the d e v e l o p m e n t of the indicators, and next investigate whether turnover has a significant impact on adoption levels of PIs. Last, we use external purchasing as a proxy for 'trust' in buyer-supplier relationships, and attempt to determine its association with the PIs.
Trends of partnership indicators. The first exercise carried out examines the trends in the partnership indicators over the recent past. In essence, this is a more detailed numerical analysis of the data presented in Figure 4. It is found that the increases in the adoption levels of partnership indicators are statistically significant in all cases except for JPD. Even here, the results are almost significant, as seen in Table 1. The increases are not dramatic, with the
Progress towards SME partnerships Table 1 Changes in partnership indicators, today and four years ago Average change of purchases covered b~ LTC J1T JPD SSV
%change 7.91 8.91 1.48 12.50
t Crit(5%, 2-tail) =1.9971 t(65) Statistic 3.43 3.17 1.45 4.51
largest increase recorded in the case of SSV, at 12.50 percentage points. Thus we have evidence of a slow but wide-ranging increase in the precursors to partnerships. Overall, we can conclude that SMEs have made clear progress towards buyer-supplier partnerships, and therefore answer our research question (1) in the affirmative.
Turnover related to partnership indicators. For the purpose of classification, medium-sized firms are defined as those with a turnover exceeding £5 million and small firms as those with a turnover lower than this figure. As seen in Table 2, there appears to be no significant difference between small and medium firms, either today or four years ago, in terms of the level of JIT and JPD arrangements. However, medium-sized firms have a significantly higher level of SSVs, both now and four years ago. Indeed, the divergence between small and mediumsized firms in this area seems to have increased over this period. Finally, turnover has a significant impact on LTC. Both today and four years ago, mediumsized firms show a significantly higher percentage of inputs covered by LTCs than do small firms. In this area, the divergence between the two appears to be growing. Thus, answering our question (2), we can observe that larger firms do move faster towards a partnership paradigm. The earlier reported widespread move towards partnerships in SMEs appears to be significantly stronger in the larger ones. Delivered lot sizes (in terms of 'number of days of input requirement') are also f o u n d to vary insignificantly between small and medium-sized firms. This result seems to support the result for JIT deliveries mentioned above. Table 2 Turnover related to partnership indicators, today and four years ago Differences between medium and small firms in % of purchases covered by LTC JIT JPD SSV
t Crit (5%, one-tail) = 1.669 t(64) Statistics
External purchasing related to partnership indicators. It is hypothesized that advances in partnerships, as measured by the indicators, lead to a greater propensity to outsource work that does not form part of a firm's 'core competencies'. The level of external input as a percentage of turnover (EIT) may then be considered a causal outcome of the level of partnership indicators. It may be argued that E I T is a tangible representation of trust and informal commitments in the buyer-supplier relationship. In sum, E I T is used as proxy for trust. This hypothesis is tested using multiple regression analysis. The dependent variable, EIT, obviously lies between 0 and 100. It is found that the data set contains several boundary data points, ie with values of 0 or 100. This means that the data are censored, and that the ordinary least squares (OLS) estimators, which do not take the restrictions on the value of E I T into account, are biased and have inflated variances. To correct for this problem, the Tobit (non-linear) estimation procedure is used. The Tobit estimation converted in four iterations. Both OLS and Tobit estimators are presented in Table 3. The improvements in the log-likelihood and the reduction in the estimated standard error by using Tobit are documented. SSV is found to exhibit a significant positive correlation with JPD. To correct the induced multicollinearity, SSV is filtered through JPD and the orthogonal residuals [SSV(f)] are used as regressors. This removes the downward bias in the t-statistics. Both L T C and JPD are found to have a significant positive effect on EIT, while neither JIT nor SSV does. Quantitatively, a 10% increase in the percentage of inputs that are subject to L T C is estimated to increase E I T by 2.1%, while a similar increase in the percentage of inputs under JPD is estimated to lead to a 3.4% increase in EIT. Answering question (3) we can observe that L T C and J P D seem to foster trust in the buyer-supplier relationship, while JIT and SSV do not.
Table 3 Relative external purchases related to partnership indicators, filtered OLS and Tobit regression results Dependent variable: EIT Regressor OLS coefficient
t Ratio
Tobit coefficient
t Ratio
Intercept LTC JIT JPD SSV(f)
9.66 2.01 1.28 3.70 0.83
45.80 0.21 -0.21 0.34 -0.69
10.04 2.36 1.34 3.83 0.87
Today
Four years ago
Diagnostics:
3.42 0.31 1.57 3.65
2.40 1.15 0.48 2.44
Log-likelihood SE (EIT) F(4,61) Adj. R2
45.78 0.19 -0.21 0.34 -0.08
-320.01 23.71 5.39 0.41
-299.90 22.81
125
R Mudambi and C P Schriinder
Conclusions There has been relatively little research on partnerships in SMEs. What literature there is tends to concentrate on SMEs as suppliers to large corporations rather than as buyers. The objective of this paper, namely the examination of partnerships of SME buyers, is therefore quite novel. We find that the actual prevalence of partnership indicators in SMEs is still relatively low. Further, the last four years have witnessed only small changes. However, all changes have been favourable to the implementation of buyer-supplier partnerships. The changes have occurred across a broad spectrum of partnership indicators, and while small, virtually all of them are statistically significant. Overall, we are able to conclude that UK SME buyers are making slow but broad-ranging moves in the direction of implementing supplier partnerships. In this sense the proposed largefirm partnership paradigm appears to be applicable in SMEs too. When we examine firms by size as measured by turnover, we find that larger SMEs carry out more supplier site visits. We also find that they cover a greater percentage of their inputs through long-term contracts. However, in other dimensions, we find that size does not seem to matter. Finally, we attempt to quantify the relationship between formal partnership indicators and the more informal aspects of the buyer-supplier relationship. We proxy the trust in the buyer-supplier relationship by purchased inputs as percentage of turnover. We find that only long-term contracts and joint product development seem to foster trust significantly in SME manufacturers. The results presented were obtained from a sample in England; nevertheless, we are certain that the results are transferable to other geographical settings. However, the results cannot be generalized beyond SME manufacturers. Our sample is fairly representative of the UK manufacturing in the SME sector (see Figure 3). Further, we specifically chose geographic areas for maximum diversity, including new industrial areas (Milton Keynes, a New Town) as well as more traditional parts of the UK industrial heartland (Luton, Northampton and Aylesbury). There is literature indicating that there may even be some transferability of the results across the Atlantic (Vastag and Whybark, 1994). SMEs seem to be following the lead of the large firms in the area of partnership development. However, we have provided some evidence for two interesting insights. First, SMEs are not a monolithic group in the area of partnering. Firm size has different effects on the adoption rates of partnership indicators. Second, different formal partnership indicators have differing impacts on the informal aspects of the buyer-supplier relationship and consequently on the 126
trust that exists between the parties. The second insight in particular may provide some guidance to SMEs in their attempts to implement partnerships. Benefits reaped from partnerships are not exclusive to large companies. However, at this stage, the larger companies, frequently the customers of 'our' SMEs, are of vital importance. By encouraging partnerships, not only with their direct suppliers, but with their suppliers' suppliers, the benefits of this manner of conducting business can be enjoyed by the entire value chain. An extension of the current study to the role of SMEs in such 'extended' partnerships in the value chain would be a useful direction for further research.
Acknowledgements We would like to acknowledge a research grant from the University of Buckingham and project support from the Milton Keynes Borough Council and the Chartered Institute of Purchasing and Supply (CIPS). We would like to thank the participants at the 4th IPSERA Conference in Birmingham. The views expressed here are not necessarily attributable to any of these institutions. Both authors have equally contributed to the work. Each blames the other for remaining errors.
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