Ž .
The SMO is the driver exogenous latent variable of the structural equation models developed in this
Ž .
study refer to Fig. 1 and contains the following performance characteristics identified from the litera-
Ž . ture. Those characteristics are 1 a long-term rela-
Ž . tionship with suppliers, 2 supplier involvement in
Ž . the product development process, 3 a reduced num-
Ž . ber of suppliers, and 4 a ‘quality focus’ meaning
that quality performance is the number one priority Ž
. in selecting suppliers. Supplier Performance SP and
Ž .
Buyer Performance BP are the two endogenous latent variables in each model. The logic and details
of Fig. 1 are explained later. In this research, we develop four different struc-
tural equation models depending on buyer’s competi- tive priorities: quality, delivery, cost, and flexibility.
By doing so, we can show how SMO and SP affect the buyer’s performance in each of the competitive
priorities. Based on these structural models, we are
Ž .
testing the theory that, ‘‘if a manufacturer buyer adopts an improved SMO, then the adoption of SMO
improves both SP and BP’’. Given the measurement scales for SMO and SP, BP is evaluated for each of
the four competitive priorities using confirmatory data analysis.
The rest of this article is organized in the follow- ing order. A literature review is presented next to
provide the background and content validity for the primary constructs of the research. Then the research
hypotheses and design are presented, followed by a section that describes the sample data. Finally, the
results of the data analysis are presented. The paper concludes by summarizing the results, limitations,
and future directions of this research.
2. Literature review
This research is aimed at testing the linkage among Ž
. the key constructs SMO, SP, and BP of supply
management. It is important to establish the content validity of each construct and associated scales. For
the BP construct, there exists considerable agreement in academia that the performance of manufacturing
companies can be evaluated by one or more key
Ž competitive priorities Wheelwright, 1984; Hayes and
. Wheelwright, 1994; Krajewski and Ritzman, 1996 .
Competitive priorities can be described in four major Ž .
Ž . Ž .
Ž . categories: 1 quality, 2 delivery, 3 cost, and 4
flexibility. These competitive priorities and their measures are shown in the Appendix. The SP con-
Ž struct is defined in the traditional way Dickson,
1966; Dempsey 1978; Benton and Krajewski, 1990; .
Forker et al. 1997; Hartley et al., 1997 in the
Appendix by the following measures: lead-times, on time delivery, delivery reliability, quality, and cost.
The SMO construct requires a more extensive review of the literature to establish its content valid-
ity. From the literature, four different performance characteristics of SMO are identified, as previously
defined. The following review of the literature de- scribes four important characteristics of supply man-
agement and how together they define the ‘‘operat- ing environment’’ within which suppliers and buyers
interact.
2.1. Long-term relationship or partnership An extended planning horizon is an important
feature of the SMO since each participant expects the relationship to continue for a considerable amount
of time. A close relationship means that channel participants share the risks and rewards and have
willingness to maintain the relationship over the long
Ž term
Landeros and Monczka, 1989; Cooper and .
Ž .
Ellram, 1993; Stuart, 1993 . Hahn et al. 1983 , in their conceptual study, provide some useful insights
to compare the potential costs associated with differ- Ž
. ent sourcing strategies. Hahn et al. 1983 state that
companies will gain benefits by placing a larger volume of business with fewer suppliers using long-
term contracts. Furthermore, through a well-devel- oped long-term relationship, a supplier becomes part
of a well-managed supply chain and ‘‘it will have a lasting effect on the competitiveness of the entire
Ž supply chain’’ Choi and Hartley, 1996, pp. 333–
. Ž
. 334 . De Toni and Nassimbeni 1999 found that a
long-term perspective between the buyer and sup- plier increases the intensity of buyer–supplier coor-
Ž .
dination. Carr and Pearson 1999 investigate the impact of ‘strategic purchasing’ on ‘buyer–supplier
relationships’ and the subsequent impact of ‘buyer– supplier relationships’ on the ‘firm’s financial per-
formance’. They also found that strategically man- aged long-term relationships with key suppliers have
a positive impact on the firm’s financial perfor- mance.
Integrated industrial relations between manufac- turers and suppliers have been cited as a critical
factor to the success of Japanese manufacturing firms. JIT purchasing is the extreme case that reveals the
Japanese conventional buyer–seller linkage that epit- omizes a small supplier-base and long-term relation-
Ž ship in a lean manufacturing environment Hahn et
. al., 1983; Waters-Fuller, 1995 . Potential benefits of
JIT purchasing are numerous. Reduction of inven- tory, delivery lead-time and supplier cost, and im-
provement of scheduling flexibility and quality are
Ž important benefits of JIT purchasing Manoochehri,
. 1984; Waters-Fuller, 1995; Gelinas and Jacob, 1996 .
A requisite of JIT purchasing to sustain the above advantages is to develop dependable suppliers.
Ž .
Manoochehri 1984 points out that credible relation- ship with fewer suppliers, information sharing with
suppliers, and geographical proximity of suppliers are essential for successful purchasing.
In practice, a significant shift has occurred from the traditional adversarial buyer–seller relationship
to the use of a limited number of qualified suppliers Ž
. Helper, 1991 . Contracts have increasingly become
long-term, and more and more suppliers must pro- vide customers with information of their processes,
Ž quality performance, and even cost structure Helper,
. 1991; Helper and Sako, 1995 . In a conventional
procurement and distribution channel, an individual company’s outstanding performance could have a
negative influence on the entire supply chain. For example, a manufacturer can transfer its inventory of
raw materials to the suppliers to minimize its inven- tory cost, yet increase total supply chain inventory
costs. This type of less coordinated channel structure leaves the manufacturers and suppliers to their own
Ž .
devices for cost control Cooper and Ellram, 1993 . 2.2. Supplier inÕolÕement in product deÕelopment
Supplier involvement is a critical aspect of SMO. For example, before initial prototyping begins, Toy-
ota invites the suppliers to their product design meet- ings. The suppliers not only design the components
but also help develop the new vehicle’s concept. First-tier suppliers are treated as long-term partners.
These partners invest in developing a variety of parts and present all the alternatives to Toyota before
Ž Toyota decides on its own vehicle concepts Womack
. et al., 1990 . Early supplier involvement is important
in the product development process to reduce the time-to-market on new product introduction. In a
Ž .
case study, Levy 1997 mentions that direct commu- nication with suppliers is inevitable to solve prob-
lems in the buying company’s product development processes.
Ž .
Hartley et al. 1997 investigate the impact of Ž
‘buyer–supplier interface management exogenous
. construct ’ on ‘supplier activities completed on time
Ž .
intermediate endogenous construct ’ and the subse- quent impact of supplier activities on ‘overall project
Ž .
delays endogenous construct ’ in the product devel- opment process. The construct, ‘buyer–supplier in-
terface management’, includes variables such as ‘timing of supplier’s involvement’, ‘supplier’s de-
sign responsibility’, and ‘buyer–seller communica- tion’. Using stepwise regression analyses, Hartley et
Ž .
al. 1997 found a statistically significant relationship between the supplier activities completed on time
and overall product development delays. This result supports the use in this research of the following
survey question; suppliers are actively involved in our new product development process.
2.3. Reduced number of suppliers In the past, it was common practice for many
American companies to contract with multiple sup- pliers. The underlying premises behind this tradition
Ž . of multiple sourcing include: 1 competition is the
Ž . basis of the American economic system; 2 purchas-
Ž . ing must not become source dependent; and
3 Ž
multiple sourcing is a risk-reducing technique New- .
man, 1989 . Reduction of the supplier base is a unique charac-
teristic of contemporary buyer–supplier relationship. Ž
. According to Kekre et al. 1995, pp. 387 , ‘‘in the
purchasing function, many firms have discarded the traditional practice of using several sources of supply
in favor of a drastic reduction in sources of supply.’’ Several important factors have caused the current
shift to single sourcing or a reduced supplier base. First, multiple sourcing prevents suppliers from
achieving the economies of scale based on order
Ž .
volume and learning curve effect Hahn et al., 1986 . Ž
. Russell and Krajewski 1992 demonstrate the bene-
fits of ‘‘coordinated replenishment’’ under current
supply management practices in which the number of suppliers decreases and the number of items from
each supplier increases. Coordinated replenishment is defined as the practice of ordering a number of
items from a common supplier to achieve full-truck- load efficiency. Presenting a mathematical program-
ming and a heuristic solution procedure, Russell and
Ž .
Krajewski 1992 conclude that coordinated replen- ishment from a common supplier is one of the best
strategies to reduce the total cost of procurement in the supply chain. Second, the multiple supplier sys-
tem can be more expensive than a single supplier
Ž .
system Treleven, 1987 . For instance, managing a large number of suppliers for a particular item di-
rectly increases costs, including the labor and order processing costs to manage multiple-source invento-
Ž .
ries. Treleven 1987 also argues that multiple sourc- ing lowers overall quality level because of the
increased variation in incoming quality among sup- pliers.
Third, a reduced supplier base helps eliminate mistrust between buyers and suppliers due to lack of
Ž .
communication Newman, 1988a,b . For example, Sun Microsystems makes extensive use of resident
suppliers that act as part of Sun Microsystems’ site materials teams. These resident suppliers help en-
hance communication between Sun Microsystems and its suppliers and, therefore, stabilize the suppli-
ers’ production planning. Fourth, worldwide compe- tition forces firms to find the best suppliers in the
world. Therefore, coordinating the supply chain in different geographic regions becomes more impera-
tive. An objective of developing a worldwide supply chain is to maximize total contributions of the best
Ž .
class suppliers Monczka et al., 1983 . Although the literature identifies ‘reduced sup-
plier base’ as an essential element for the successful supply management, little scientific research has
tested the association between a reduced supplier base and the supplierrbuyer overall performance.
Most of the previous work cited is based on expert opinions and case studies, but there are a few excep-
tions. One exception is the research of Kekre et al. Ž
. 1995 , who tested the relationship between the num-
ber of suppliers and relative product quality per- formance using a standard two-stage least squares
Ž .
estimation procedure. Kekre et al. 1995 found a Ž
. statistically significant relationship
p - 0.05 be-
tween using a limited number of suppliers and in- creases in relative product quality. De Toni and
Ž .
Nassimbeni 1999 also found that supply base re- duction policies are positively related to the buyer–
supplier product design relationship defined by ‘in- formation exchange concerning product and process’
and ‘supplier involvement in product development’.
2.4. Quality performance is the number one priority in selecting suppliers
Quality has always been one of the most impor- tant performance criteria even with a conventional
Ž purchasing strategy Dickson, 1966; Dempsey, 1978;
Willis and Huston, 1989; Helper, 1991; Weber et al., .
Ž .
1991; Choi and Hartley, 1996 . Dickson 1966 states Ž .
that three factors, 1
the ability to meet quality Ž .
standards; 2 the ability to deliver products on time; Ž .
and 3 the performance history, are the most critical determinants in choosing suppliers.
Many studies emphasizing a ‘quality focus’ of the supply management are also conceptual studies
ŽManoochehri, 1984; Treleven, 1987; Baxter et al., .
1989; etc. . The basic arguments of these studies are Ž .
1 supplier quality is a critical determinant for over- Ž .
all product quality and costs, 2 information of the suppliers’ quality control system and quality perfor-
mance helps buyers to select the right price level of Ž .
the components, and 3 a close supplier–buyer rela- tionship is a requisite of information sharing.
Ž .
Helper 1991 shows how American automakers’ supplier selection criteria has changed based on sur-
veys conducted during middle 1980s, the period in which the American purchasing practices were sig-
nificantly affected by Japanese supply management practices. Descriptive statistics of the research show
that importance of quality criteria increased the most while that of price went up the least during the
Ž .
period. Choi and Hartley 1996
explore supplier selection practices at various tiers of the supply
chain. They define a new construct called a ‘Con- sistency Factor’, which encompasses important di-
Ž mensions of the competitive priorities conformance
quality, consistent delivery, quality philosophy, and .
prompt response except for ‘Cost’. They found the ‘Consistency Factor’ to be the most important supply
selection criterion in the supply chain.
Ž .
Forker et al. 1997 studied the impact of Total Ž
. Quality Management TQM practices in the supply
chain on the quality performance of suppliers using both regression and Data Envelopment Analysis
Ž .
DEA . TQM practices are measured by such a variety of constructs as top management support,
productrservice design, supplier quality manage- Ž
. ment, quality data and reporting. Forker et al. 1997 ,
however, could not find a significant relationship between TQM practices and suppliers’ quality per-
formance. Rather, they found through DEA that the individual suppliers’ relative efficiency moderates
the relationship between TQM practices and quality performance. The outcome of this research has lim-
ited generalizability since suppliers’ performance is measured by a single criterion, acceptable parts per
million.
In this section, we reviewed the literature to estab- lish the content validity of each construct and associ-
ated scales. Next, we hypothesize the casual relation- ship among the constructs in order to investigate the
impact of SMO on SPrBP.
3. Research hypothesis and design
