Executive Summary
A manufacturer’s relationships with its supply chain partners are important parts of its overall strategy. For example, relationships with upstream suppliers may contribute significantly to a firm’s marketing initiatives toward downstream customers. Importantly, industry observation suggests that high-performing supply chain relationships do not emerge on their own. Rather, they require some form of a “visible hand,” or explicit governance efforts to reduce the friction that is inherent in interactions between self-interested parties. The study examines how a manufacturer’s governance of an external supplier relationship affects its operational performance toward a downstream retail customer, as reflected in a range of service outputs, such as delivery quality, cycle time, and order accuracy.
The empirical context for the study is the U.S. apparel industry, and the research setting is the supply chain involving an apparel manufacturer, an upstream supplier (contractor), and a downstream retail customer. The results show that a manufacturer’s reliance on supplier norms and incentives both promote performance. Specifically, the stronger the norms or incentives in the focal external supplier relationship, the closer is the upstream coordination, and the greater is the manufacturer’s ability to respond to downstream market conditions. This suggests that a firm’s dyadic relationship-building efforts are associated with economies that go beyond the dyad in question. The study also examines whether these performance effects depend on how functional areas and relationships within the manufacturer firm itself are governed. Importantly, the processes and workflows that constitute a manufacturer’s relationship with an external supplier (e.g., product design, delivery) also involve departments and relationships within the firm itself (e.g., merchandising, product design, sales). These internal relationships and the relevant boundary personnel are also subject to governance mechanisms such as norms and incentives.
However, a firm’s internal governance arrangements do not necessarily mirror its external ones. This raises the question of what happens when supply chain workflows are subject to different governance regimes across external and internal relationships. The results show that the performance effect of each external governance mechanism is weakened in the presence of a different governance regime within the manufacturer firm. Specifically, internal incentives weaken the effect of external norms, and internal norms weaken the effect of external incentives. The findings point to the difficulty of managing sets of relationships that involve different parties and mechanisms. They also suggests that firms must explicitly account for both (1) the performance gains from using norms and incentives within a particular relationship and (2) the potential losses that are produced by governance mismatches across relationships. For example, a narrow focus on individual relationships and governance mechanisms will miss the occurrence of governance mismatches and related performance losses. In particular, the findings suggest that firms must exercise caution when making changes to their existing governance menus. For example, while adding a governance mechanism, such as explicit incentives, at one level in an overall supply chain provides some degree of incremental control, the overall effect on the chain’s performance need not be positive, to the extent that the incentives produce costly mismatches with norms elsewhere in the overall supply chain.
Biography
Alok Kumar is Assistant Professor of Marketing in the Smeal College of Business at the Pennsylvania State University. His research interests are interorganizational relationships and coordination in supply chains and distribution systems.
Jan B. Heide is the Irwin Maier Chair in Marketing at the University of Wisconsin-Madison. He is also a Professorial Fellow in the Department of Management and Marketing at the University of Melbourne and a Senior Research Associate in the Judge Business School at the University of Cambridge. His research focuses on the interfirm relationships. He has published in Journal of Marketing, Journal of Marketing Research, Academy of Management Journal, Academy of Management Review, Journal of Law and Economics, and Journal of Law, Economics, and Organization. He serves on the editorial review boards for Journal of Marketing, Journal of Marketing Research, Marketing Science, Journal of Retailing, Managerial and Decision Economics, and Journal of Business-to-Business Marketing. He is a former Associate Editor for Journal of Marketing Research.
Kenneth H. Wathne is BGF Chair and Professor of Marketing in the BI Norwegian School of Management and Adjunct Professor in the School of Business in the University of Stavanger. Wathne earned his PhD at the Copenhagen Business School. Before joining the faculty at BI Norwegian School of Management, he worked as an assistant professor at the University of Wisconsin–Madison. He has published in Journal of Marketing, Journal of Marketing Research, and Marketing Letters; he has contributed to book chapters on interorganizational relationships; and he currently serves on the editorial review boards of Journal of Marketing, International Journal of Research in Marketing, and Journal of Business-to-Business Marketing. Wathne is the corecipient (with Jan B. Heide) of the 2008 Louis W. Stern Award from the American Marketing Association. Wathne currently teaches interorganizational relationships and business-to-business marketing. He is four-time recipient of the Mu Kappa Tau Marketing Professor of the Year award.
Journal of Marketing, Volume 75, Number 2, March 2011
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