The Effect of Operations Strategy on Supplier-Customer Relationships and Supplier’s Financial Performance

As a key to a firm’s success, effective supply chain management practices have received enormous attention from both academics and practitioners. Especially, a shift in a paradigm of supplier-customer relationships from an “arm’s length” type of interaction to a “closer tie” relation in the manufacturing industry has been widely reported (Frazier et al. 1988; Heide and John 1990; The Economist 2006). The literature suggests that a move towards to a close customer-supplier relationship is mutually beneficial for the parties involved. It is argued, for example, that close relationships enhance the financial performance of the buyer firms through reduced costs and increased profits (see Noordewier et al. 1990; Gosman et al. 2004). Yet, the benefits of close supplier-manufacturer relationships accruing to supplier firms have not been well documented. In this study, we empirically assess the impact of close relationships between suppliers and customers on the financial performance of the supplier. Specifically, we are interested in whether and how a supplier’s strategic choices in the operations area affect its relationship with a customer and help balance risks and rewards in the relationship. Cross-sectional data are collected by survey (available online and by mail) from suppliers in the manufacturing industry. The direct and mediated relationships among the capabilities associated with operations strategies, the supplier-manufacturer relationships, and the financial performance of suppliers are tested using structural equation modeling. Our findings from this study are expected to have several important managerial implications. Firstly, our integrative study shows a link between the operations capabilities and the suppliercustomer relationships. Secondly, our study suggests a way to simultaneously enhance the suppliers’ relationships with their customers and the profitability associated with these relationships. Lastly, our study verifies a link between close supplier-customer relationships and the suppliers’ financial performance from the relationships. Working Paper Yoon Hee Kim and Urban Wemmerlöv June 4, 2009 3 of 52