STR4TEGIC SUPPLIER SEGMENTATION: A lMODEL FOR MANAGING SUPPLIERS IN THE 21ST CENTURY

This study of 453 supplier-automaker relationships in the U. S., Japan, and Korea examines the extent to which automakers manage their “arms-length” and “partner” suppliers differently. The findings indicate that U.S. automakers have historically managed all of their suppliers in an arms-length fhshion, Korean automakers have managed all suppliers as partners, and Japanese automakers have segmented their suppliers and have somewhat different relationships depending on the nature of the component. Only Japanese automakers (Toyota and Nissan) have strategically segmented suppliers in such a way as to realize the benefits of both the arms-length and partner models of supplier management. We argue that firms should think strategically about supplier management, and perhaps should not have a “one size fits all” strategy for supplier management. During the past decade we have seen an increased emphasis on alliances, networks, and supply chain management as vehicles through which firms can achieve competitive advantage. Indeed, the typical industrial firm spends more than one half of every sales dollar on purchased products--and this percentage has been increasing with recent moves towards downsizing and outsourcing (U.S. Bureau of Census, 1985; Bresnan & Fowler, chain management and purchasing performance is increasingly 1994). Consequently, supply recognized as an important determinant of a firm’s competitiveness. Two widely differing supplier management models have emerged from both practice as well as academic research on the issue of how to optimally manage suppliers. The traditional view, or the arms-length model of supplier management, advocates minimizing dependence on suppliers and maximizing bargaining power. Michael Porter (1980: 123) describes this view of supplier management as follows: In purchasing, then, the goal is to find mechanisms to offset or surmount these sources of suppliers’ power. . . Purchases of an item can be spread among alternate suppliers in such a way as to improve the firm’s bargaining power. The key implication of this model for purchasing strategy is for buyers to deliberately keep suppliers at “arm’s-length” and to avoid any form of commitment. The arms-length model was widely accepted as the most effective way to manage supplier relationships in the United States until the success of Japanese f-, who did not use this model, forced a reevaluation of the model’s basic tenants. In contrast to the arms-length model, the success of Japanese firms has oflen been attributed to close supplier relationships, or a parfner modef of supplier management (Cusumano, 1985; Womack et al 1990; Dyer& Ouchi, 1993; Nishiguchi, 1994). Various studies suggest that, compared to arms-length relationships, Japanese-style partnerships result in superior performance because partnering firms: (1) share more information and are better at coordinating interdependent tasks (Fruin, 1992; Clark& Fuj irnoto, 199 l; Womack et al, 1990; Nishiguchi, 1994), and (2) invest in relation-specific assets which [ower costs, improve quality, and speed product development (Asanuma. 1989; Dyer, 1996a. Ho\vever. \vhile Japanese-style partnerships have economic benefits, some researchers hale found that these types of relationships are costly to set up and maintain, and may reduce a customer’s ability to switch away from inefficient suppliers (Helper, 199 1; Sake, 1992). The practical application of these two models can be found in the automotive industry. where General Motors has historically used an arms-length model while Toyota has emplo}-ed a partner model. It has been well documented that particularly during the much publicized reign of Jose Ignacio Lopez de Arriortua, General Motors attempted to generate cost savings by fostering vigorous supplier competition and maintaining arms-length relationships. Dr. Lopez pushed suppliers to reduce prices by renegotiating contracts and opening up parts to competitive bidding--sometimes going through more than 5 rounds of bidding. Although critics argue that the long term negative effects of this strategy are yet to be felt, Lopez is credited with sa~ing G>l roughly $3.0-4.0 biiiion as a result of these tough supplier management practices (Business Week, August 8, 1994). In contrast, Toyota (and more recently Chrysler in the United States) has developed long term partnerships with suppliers who are given implicit guarantees on future business. Tnreturn, suppliers make relation-specific investments to enhance their productivity in the Toyota relationship. 1 Past studies indicate that these relation-specific site, physical, and human asset ‘ Transaction or relation-specific investments are assets that are uniquely tailored to a particular exchange relationship and which have low salvage value outside of the relationship. Williamson (1985) identified site, physical, human, and dedicated assets as four distinct types of transaction-specific investments. investments reduce inventories, improve quality, and speed product development (Asanuma, 1989; Dyer, 1996a). Of course, the key question facing purchasing executives is: which model of supplier management is superior? Many firms in considering a model for supplier management tend to dichotomize this issue--choosing either the arms-length model or the partnership model. For example, U.S. automakers have historical y relied primarily on the arms-length model of supplier management, whereas Japanese automakers are believed to have exclusively relied on a partner model (though as we will show, this is not an entirely accurate perception). Our research on -!53 supplier-automaker relationships in the U. S., Japan, and Korea suggests that firms should think more strategically about supplier management, and perhaps should not have a “one size fits all” strategy for supplier management (see the appendix for a brief description of the study). Instead, each supplier should be analyzed strategically to determine the extent to which the supplier’s product contributes to the core competence and competitive advantage of the buying firm. .% we shall show, a company’s ability to strategically segment suppliers in such a way as to realize the benefits of both the arms-length as well as the partner models maybe the key to fbture competitive advantage in supply chain management. In this article we lay out a framework to assist firms in deciding whether to manage a particular supplier in an arms-length or partnership fashion. To illustrate the advantages of supplier segmentation, it is useful to examine the supplier management practices of U. S., Japanese, and Korean automakers. Supplier-Automaker Relationships in the United States Previous studies suggest that arms-length supplier relationships differ from supplier