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I! 1’;er 57:11:" _{1’ ) . ,2 I;{’?l::? "n”. " nu- , ,,,}£2""""'." . ’71.; I," O‘ 2.3;,” 12775! ~39 iii-‘2' :{5-‘5 r , J [/1 fi’:“’? 3‘11!" 1’} 9:"1’1’1' "I? _ ,1 11,, :cE -.v: v.- :4 a 34’» NA . 1 3000,qu llLL‘UlLlL M L LIBRARY Michigan State University RHES‘I; This is to certify that the dissertation entitled An Empirical Study of Buyer/Seller Relationships In US. Manufacturing Firms presented by Robert Landeros has been accepted towards fulfillment of the requirements for PhD. degree in Business Administration /4/% 2a» / Major professor Date fiai" if MS U is an Affirmative Action/Equal Opportunity Institution 0-12771 )V1ESI_J RETURNING MATERIALS: Place in book drop to LlBRARIEs remove this checkout from your record. FINES will be charged if book is returned after the date stamped below. ‘1 W itAl20619- ' s I. 062%” "Mi flag} 5 3‘ “3137‘”: A c rim-M190: 20R AN EMPIRICAL STUDY OF BUYER/SELLER RELATIONSHIPS IN US. MANUFACTURING FIRMS By Robert Landeros A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Management 1988 ABSTRACT AN EMPIRICAL STUDY OF BUYER/SELLER RELATIONSHIPS IN US. MANUFACTURING FIRMS By Robert Landeros Previous buyer/seller relationship research has either attempted to assist selling firms to develop better marketing strategies, or has described the effect of Just-In-Time buyer/seller relationships on the purchasing activity. The research of this dissertation departs from these two previous perspectives. Specifically, it examines the influence of certain factors when choosing different buyer/seller relationships and the importance of certain source selection criteria when evaluating a potential supplier for the two different buyer/seller relationships. The research used data from 680 completed questionnaires to test, statistically, hypotheses concerning the choice of a buyer/seller relationship and the evaluation of a potential supplier for one of two types of buyer/seller relationships. Upon further examination of the data, an assessment was made on the interrelationship of the influencing factors and two buyer/seller relationships, and the importance of various source selection criteria for two buyer/seller relationships. The assessment concluded that the choice of a buyer/seller relationship was influenced differently by the purchase requirement, the purchasing objectives of the buying firm, the characteristics of the possible suppliers, and the characteristics of the supply market. The assessment also concluded that source selection criteria varied in their importance when a potential supplier was evaluated for different buyer/seller relationships. Copyright by ROBERT LANDEROS© 1988 Look at all my trails and tribulations, Sinking in a gentle pool of wine. Don’t disturb me now I can see the answer, ’Till this evening is this morning life is fine . . . Tim Rice, 1970 ACKNOWLEDGEMENTS After completing this tome, I am impelled to recognize all those who made it possible for me to accomplish this project. This dissertation was not my effort alone, but a joint effort involving the support and encouragement of many individuals. I am deeply indebted to my dissertation chairman, Professor Robert M. Monczka for suggesting this topic to me. Through his guidance and constructive criticism I feel adequately trained to go out and learn something. My intellectual growth was also enhanced by the other members of my dissertation committee, Dean Phillip L. Carter, and Professors John A. Wagner III and Joseph R. Carter. To all of you I am indebted for your willingness to read countless drafts, some of which were not worthy of your efforts. Nevertheless, each of you always offered me direction and hope, even though at the time I was not sure of either of them. A sincere note of gratitude also goes to the Academic Planning Committee of the National Association of Purchasing Management for their financial support by granting me a Doctoral Fellowship. Without their help this dissertation could never have been completed. I also wish to acknowledge John H. Hoagland, the National Association of Purchasing Management Professor at Michigan State University, for recognizing that my dissertation research would contribute to the study of industrial purchasing. I am grateful to my colleagues at Arizona State University for their unselfish support by providing me with the time to finish this research. Now I will start serving on committees and relieve some of you of your extra duties. Also I want to thank Vicki and Dwight for inspiring me to work diligently on my dissertation so we may begin joint research projects which up to this time we have only talked about. iii During my stay at Michigan State University I made many friends and developed a myriad of colleagues . . . to all of you, thank you for being there. Gary, thank you for showing me how to bypass the lines in the pit and providing me a place to stay. Ron, Steve, Ray and Satish without each one of you, I never would have made it this far. My dear friend Barbie, you made it bearable, I am glad you were there for me, and I will always be there for you. And, Dave, the brother I never had, let us continue our kinship, and let us put forth our ideas which seemed clearer after a manifold of local brews, . . . and, as always let us toast "to our fathers . . . and their sons." When I went to Michigan I left behind my Mother and Sister in California. I feel that I was always in their prayers and thoughts. Without either of them this episode of my life would not have been written. The only regret I have is that my Father is not here so I may inflict this book upon him. Finally, to Katrina, who saved me from wandering nights and the possible dreaded consequences of living alone in a college town. Without your love, understanding and editorial ability, this dissertation would have taken years to complete. It is now time for us to discover all those things which we have missed during the last year. I promise you a lifetime to make-up one lost year . . . and, the next choice will be yours! iv TABLE OF CONTENTS LIST OF TABLES .............................. LIST OF FIGURES ............................. CHAPTER I. INTRODUCTION .......................... Importance of Buyer/Seller Relationship Models .......... Buyer/Seller Relationship Models .................. Research Direction ........................ Empirical Research Limitations .................. Preview of Dissertation ...................... II. LITERATURE REVIEW ....................... Previous Buyer/Seller Relationship Research ............ Purchasing Process Decision-Making ................ Source Selection Criteria Literature ................ Summary of Reviewed Literature ................. III. BUYER/SELLER RELATIONSHIP DECISION MODEL ........ Factors Influencing the Buyer/Seller Relationship ......... Source Selection Criteria and Buyer/Seller Relationships ...... Buyer/Seller Relationship Decision Model Summary ......... IV. RESEARCH DESIGN AND METHODS ................ Validation of the Buyer/Seller Relationship Decision Model ..... Internal Validation ....................... _ External Validation ....................... Mail Questionnaire Survey Design ................. Research Sample ......................... Measures ............................. Influencing Factors ....................... Source Selection Criteria .................... Other Measures ......................... Statistical Hypotheses and Data Analyses .............. Descriptive Statistics ..................... Analysis of Influencing Factors Differences .......... Analysis of Source Selection Criteria Differences ........ Summary of Research Design and Methods .............. 27 29 36 43 44 44 45 46 46 47 51 51 54 56 56 56 57 58 59 CHAPTER RESEARCH FINDINGS ........................ Descriptive Statistics ....................... Responses ........................... Normality of the Data Sets ................... Centrality of the Data Sets ................... Influencing Factors ..................... Source Selection Criteria .................. Percentages of Buyer/Seller Relationships .......... Estimate of Interval Confidence ................ Influencing Factors ..................... Source Selection Criteria .................. Percentages of Buyer/Seller Relationships .......... Hypothesis Testing Results .................... Influencing Factors ...................... Source Selection Criteria .................... Summary of Research Findings ................... ASSESSMENT OF THE BUYER/SELLER RELATIONSHIP DECISION MODEL ......................... Influencing Factors and the Buyer/Seller Relationship Model Assessment of the Factors Influencing the Choice of a Buyer/Seller Relationship ................... Purchase Requirement Orientation .............. Characteristics of the Supply Market ............. Characteristics of the Possible Suppliers .......... Purchasing Objectives of the Buying Firm .......... Summary .......................... The Source Selection Criteria Pool and the Buyer/Seller Relationship Model ........................ Assessment of Source Selection Criteria Importance When Evaluating a Potential Supplier ................. Loosely Coupled Buyer/Seller Relationships .......... Tightly Coupled Buyer/Seller Relationships .......... Summary .......................... Summary of The Buyer/Seller Relationship Decision Model Assessment .................... SUMMARY AND IMPLICATIONS ................ Summary of the Dissertation .................... Models of Buyer/Seller Relationships .............. Choice of a Buyer/Seller Relationship .............. Purchasing Requirement Orientation ............. Purchasing Objectives of the Buying Firm .......... Characteristics of the Supply Markets ............ Characteristics of the Possible Suppliers .......... Evaluation of a Potential Supplier ............... Loosely Coupled Buyer/Seller Relationships .......... Tightly Coupled Buyer/Seller Relationships .......... Implications of the Research .................... Purchasing Management ..................... Future Research ........................ Page 61 61 61 63 65 70 73 74 74 75 76 77 77 85 88 91 91 97 99 100 101 101 102 102 108 108 108 110 110 112 112 112 114 115 116 117 117 119 119 120 121 123 125 APPENDIX Page A. VALIDATION WORK SHEETS AND QUESTIONNAIRE-WORKING COPY ................. 127 B. COVER LETTER AND QUESTIONNAIRE .............. 146 C. GEARY NUMBER TABLES ..................... 155 D. ESTIMATE OF GEARY NUMBER FOR TESTING NORMALITY . . . 162 E. t-TESTS RESULTS FOR PERCENTAGES OF BUYER/SELLER RELATIONSHIPS BY INDUSTRIES ........ 164 F. CONFIDENCE INTERVAL ESTIMATE TABLES . . - ......... 167 REFERENCES ................................ 177 vii TABLE V-8 V-9 V-lO VII-l LIST OF TABLES Ranking of Means of Factors Influencing the Choice of Loosely Coupled Buyer/Seller Relationships ............. Ranking of Means of Factors Influencing the Choice of Tightly Coupled Buyer/Seller Relationships ............ Ranking of Means of Source Selection Criteria Importance When Evaluating a Potential Loosely Coupled Supplier ........ Ranking of Means of Source Selection Criteria Importance When Evaluating a Potential Tightly Coupled Supplier ........ Means of Percentages for Loosely Coupled and Tightly Coupled Buyer/Seller Relationship—The Sample Firms ............ Ranking of Matched t-Tests Means for the 39 Influencing Factors When Choosing Loosely Coupled Buyer/Seller Relationship ...... Ranking of Matched t-Tests Means for the 39 Influencing Factors When Choosing Tightly Coupled Buyer/Seller Relationship ...... Ranking of Matched t-Tests Results for the 39 Influencing Factors When Choosing a Buyer/Seller Relationship ............. Ranking of Matched t-Tests Means for the 39 Source Selection Criteria When Evaluating a Potential Supplier for a Loosely Coupled Buyer/Seller Relationship .............. Ranking of Matched t-Tests Means for the 39 Source Selection Criteria When Evaluating a Potential Supplier for a Tightly Coupled Buyer/Seller Relationship .............. Ranking of Matched t-Tests for the 39 Source Selection Criteria When Evaluating a Potential Supplier ................ Ranking of Deltas for the 31 Significantly Different Influencing Factors .................... Ranking of Deltas for the 38 Significantly Different Source Selection Criteria When Evaluating a Potential Supplier ....... Predominate Factors Which Influence the Choice of a Loosely Coupled Buyer/Seller Relationship ............. viii Page 66 68 71 72 73 78 80 83 86 87 89 93 TABLE VII-2 VII—3 VII—4 C-2 C-3 E-l E-2 E-3 F-2 F-3 F-4 Predominate Factors Which Influence the Choice of a Tightly Coupled Buyer/Seller Relationship ............. Predominate Source Selection Criterion Which is Important When Evaluating a Potential Supplier for a Loosely Coupled Buyer/Seller Relationship .............. Predominate Source Selection Criterion Which is Important When Evaluating a Potential Supplier for a Tightly Coupled Buyer/Seller Relationship .............. Ranking of Geary Test Numbers of Factors Influencing the Choice of a Loosely Coupled Buyer/Seller Relationship ........ Ranking of Geary Test Numbers of Source Selection Criteria Importance When Evaluating a Potential Loosely Coupled Supplier . . . . Ranking of Geary Test Numbers of Factors Influencing the Choice of a Tightly Coupled Buyer/Seller Relationship ........ Ranking of Geary Test Numbers of Source Selection Criteria Importance When Evaluating a Potential Tightly Coupled Supplier . . . . Ranking of Geary Test Numbers of Percentages for Loosely Coupled Buyer/Seller Relationships ..................... Ranking of Geary Test Numbers of Percentages for Tightly Coupled Buyer/Seller Relationships ..................... Ranking of Matched t-Tests Results for the Percent of Contracts Ranking of Matched t-Tests Results for the Percent of Suppliers Ranking of Matched t-Tests Results for the Percent of Expenditures Ranking of Confidence Interval Estimates of Factors Influencing the Choice of a Loosely Coupled Buyer/Seller Relationship at a 10.005 Model Parameter ....................... Ranking of Confidence Interval Estimates of Selected Factors Influencing the Choice of a Loosely Coupled Buyer/Seller Relationship at Various Model Parameter ............... Ranking of Confidence Interval Estimates of Factors Influencing the the Choice of a Tightly Coupled Buyer/Seller Relationship at a $0.005 Model Parameter ....................... Ranking of Confidence Interval Estimates of Selected Factors Influencing the Choice of a Tightly Coupled Buyer/Seller Relationship at Various Model Parameter ........ ix Page 119 121 121 155 157 158 160 161 161 164 165 166 167 169 170 172 TABLE F-5 F-6 Ranking of Confidence Interval Estimates of Source Selection Criteria Importance When Evaluating a Loosely Coupled Supplier at a $0.005 Model Parameter ....................... Ranking of Confidence Interval Estimates of Source Selection Criteria Importance When Evaluating a Loosely Coupled Supplier at Various Model Parameters ...................... Ranking of Confidence Interval Estimates of Source Selection Criteria Importance When Evaluating a Tightly Coupled Supplier at a $0.005 Model Parameter , ....................... Ranking of Confidence Interval Estimates of Source Selection Criteria Importance When Evaluating a Tightly Coupled Supplier at Various Model Parameters ...................... Confidence Interval Estimates for Means of Percentages of Loosely and Tightly Coupled Relationships at the $0.001 Model Parameter ....................... Page FIGURE III-1 III-2 III-3 III-4 III-5 III—6 VII-1 D-l D-2 LIST OF FIGURES Characteristics of Buyer/Seller Relationships ........ Source Selection Criteria Decision Model .......... Buyer/Seller Relationship Decision Model .......... Purchase Requirement Orientation—Influencing Factors . . . Purchasing Objectives of the Buying Firm—Influencing Factors Characteristics of the Possible Suppliers—Influencing Factors Characteristics of the Supply Market—Influencing Factors . . Source Selection Criteria Pool of the Buyer/Seller Relationship Decision Model .......... Factors Influencing the Choice of a Buyer/Seller Relationship Source Selection Criteria Categories Used When Evaluating a Potential Supplier ............... Final Buyer/Seller Relationship Decision Model ....... 5 Percent Probability Points—Geary Number ......... 5 Percent Probability Points—Estimated Geary ........ xi ..... 25 28 30 32 33 35 42 98 163 CHAPTER I INTRODUCTION Virtually all research concerning the relationships between manufacturing firms, buying from and selling to each other, has been conducted using two different pers— pectives. The first is an industrial marketing perspective which emphasizes the develop- ment of effective marketing strategies for differently defined buyer/seller relationships.1 The second is a purchasing management perspective which describes the changes to the "purchasing process” caused by buyer/seller relationships in just-in-time environments.2 However, prevailing research has not addressed two decision junctures associated with buyer/seller relationships: (1) whether differences exist between the influence of possible factors on the choice of a buyer/seller relationship; and (2) whether differences exist between the importance of various source selection criteria during the evaluation of a potential supplier for different types of buyer/seller relationships. These two decision junctures associated with buyer/seller relationships are ad- dressed by this dissertation. However, to. address these two decision junctures, the 1H. Hakanson, J. Johanson and B. Wootz, "Influence Tactics in Buyer-Seller Processes,” ndustrial Marketing Management, December 1979, pp. 319-332.; also see F.S. DeBruicker and G.L. Summe, "Make Sure Your Customers Keep Coming Back," Harvard Bueiness Review, January-February 1985, pp. 92-98.; also see D. Ford, "Buyer/Seller Relationships in International Markets, Ingaetrial Marketing Management, May 1984, pp. 101-112.; also see C.M. Watson, "Balancing Dominance: Diagnosing the Buyer-Seller Relationship,” Business Herizens, September-October 1984, pp. 62-65. 2G.H. Manoochehri, "Suppliers and the Just-In-Time Concept," Journal ef Purchasing and Materials Management, Winter 1984, pp. 16-21.; also see R.J. Schonberger and A. Ansari, "Just-In-Time Purchasing Can Improve Quality," Journal of Purchasing and Materiale Management, Spring 1984, pp. 2-7.; also see R.J. Schonberger and J.P Gilbert, "Just-In-Time Purchasing: A Challenge for US. Industry," Califernia Management Review, Fall 1983, pp. 54-68. 2 research of this dissertation first developed three descriptive models for distinguishing between buyer/seller relationships. Next, two sets of hypotheses were tested. The first set of hypotheses tested for differences between the influence of certain factors on the choice of a buyer/seller relationship. The second set of hypotheses tested for differ- ences between the importance of certain source selection criteria when evaluating a potential supplier for different buyer/seller relationships. This chapter presents the development of buyer/seller relationship models. First, it explains the importance of having models which distinguish between different buy- er/seller relationships. Second, it presents the theoretical underpinning for the models as well as the descriptive models themselves. Third, it states the research directions leading from these models, and the specific research questions addressed by the empirical research of this dissertation. Finally, this chapter describes the limitations of the empirical research and presents an overview of the following chapters. IMPORTANCE OF BUYER/SELLER RELATIONSHIP MODELS Models for distinguishing different buyer/seller relationships are important for two reasons. First, several recent practitioner publications have reported that US. manufac- turing firms are changing the type of relationship they have with their suppliers.3 Future research cannot begin to investigate and analyze fully the motivation behind 3L. Adkins and W. Diller, ”Industry’s Quiet Revolution," Dan’s Busine§§ Menth, June 1983, pp. 72-75.; J. Bohn, ”Supplier Relationships Changing," Beginegg Marketing, December 1983, p. 9.; RB. Crosby, "Supplier Audits Shouldn’t Be Used as Material Inspection Parties," Parehaeing, June 7, 1984, p. 100A27.; S. Dowst, "Just-In-Time Isn’t Just Inventory Reduction," Purehaeing, December 19, 1985, p. 27.; T. Drozowski, "At GM, They’ve Got Young Car Buyers in Mind," Parehaeing, November 7, 1985, pp. 67-71.; T. Drozowski, "Purchasing AT GM Restyles For The 90’s," Purchaeing, October 24, 1985, pp. 56-60.; E. Raia, ”Survival: Your Supplier Gives You More Than An Outside Chance," Purchasing, December 5, 1985, p. 45.; GS. Ruderman, ”Motorola’s Working Hard At Making Its Leverage Pay,” Purehaeing, June 7, 1984, pp. 100A18-100A21.; J.F. Russell, "Small Staff Brings Lots of Savvy to Electronics Buying," Purchasing, November 7, 1985, pp. 74A12-74A17.; A.J. Roger, "How Miller Electric Buys Metals," Purchasing, July 25, 1985, pp. 51- 53.; T.Stundza, 'Now’s the Time to Shed the ’We Buy, You Supply’ Attitude," Parehaeing, May 24, 1984, p. 34.; T.R. Temin, ”Purchasing at AT&T Tech- nologies: Getting Ready for What’s Ahead,” Parehging, May 10, 1984, pp. 82-89. 3 these changes without models which illustrate the various types of buyer/seller relation- ships manufacturing firms may use. Second, the purchasing activity accounts for a majority of most US. manufacturing firms’ expenditures. Data collected by the US. Bureau of the Census show that, on average, US. manufacturing firms use 57.1 percent of their sales dollars for purchases; if expenditures for capital equipment are included, the proportion goes up to 60.5 percent.4 This is about one-and-a-half times the remaining 39.5 percent available to pay salaries, wages, other operating expenses, taxes, interest and dividends. As US. manufacturing firms strive to become more efficient, it seems likely that they will increase their purchases from specialized suppliers,5 and so the proportion of purchases to sales dollars may further increase.6 Since the purchasing activity is a major component of US. manufacturing firms, research into the purchasing process requires models which include the type of relationships a firm may have with its suppliers, and thus provide a more complete representation of the purchasing process. The theoretical research in this dissertation led to the development of three descriptive models for distinguishing between different buyer/seller relationships. The following section describes the background for developing these models as well as the descriptive models themselves. 4US. Department of Commerce, Bureau of the Census, 1234 Annaal Survey of Manafaemrers; Statistics fer Industry Greaes ang Ingestgies, (Washington: Government Printing Office, July 1986), p. 4. 5D.N. Burt and WK. Soukup, ”Purchasing’s Role in New Product Development,” Harvarg Easiness Review, September-October 1985, pp. 95-97. 6M.R. Leenders, H.E. Fearon and W.B. England, Parehasing and Materials Manage- ment (Homewood, Illinois: Richard D. Irwin, Inc., 1985), p. 8. 4 BUYER/SELLER RELATIONSHIP MODELS US. manufacturing firms have traditionally restricted their buyer/seller relation- ships to the extreme options of open market bargaining and backward integration.7 Open market bargaining prevents a buying firm from becoming too dependent on a single supplier by allowing it to select a supplier from a wide supply pool. This enables a buying firm to play one supplier off against another. Open market bargaining also provides firms with maximum control over the buyer/seller relationship as it allows the buying and selling firms to stipulate contingencies associated with purchases on separate contractual agreements. These agreements are often re-written at each contract interval with short-term forecasts of the immediate future as their primary concern.8 In open market bargaining, buying and selling firms are separate and independent enterprises. The buying and selling firms do not exchange information about their activities nor cope collectively with changes in their operating environments. Glassman described similar relationships between living systems and concluded that "the prominent overall feature is their independence of momentary environmental change, which they achieve by virtue of their self -adjusting properties."9 Glassman identified this relationship as "loose coupling" among systems which is similar to Ashby’s concept of ”independence in systems."10 Extending Glassman and Ashby’s concepts to the purchasing behavior of a manufacturing firm buying goods and services in an open market bargaining situation, the following descriptive model of a ”loosely coupled buyer/seller relationship" was developed: 7R.H. Hayes and SC. Wheelwright, Restering gar gempetitive Edge; Competing Threagh Manufaeturing (New York: John Wiley and Sons, 1984), p. 297. 80.15. Williamson,M rk n Hi r hi 'Anl i n An itr 1m li in (New York: The Free Press, 1975), p. 94. 9RB. Glassman, "Persistence and Loose Coupling in Living Systems," Behavieral Same, March 1973, p. 84. loW.R. Ashby, Design Eat A Bgin (New York: John Wiley and Sons, Inc.: 1960), pp. 158-170. 5 . Acquires goods and services in a competitive environment where many suppliers are available. . Plays one supplier off against another for the buying firm’s benefits. - Resolves disputes through unyielding negotiations. . Exchanges only limited information with the supplier. . Adjusts separately to operating and marketplace conditions. A manufacturing firm may also furnish its own raw materials and components through backward integration. Ashby viewed this type of relationship as a "fully joined system” where a perturbation of any of the operating variables would require adjustment of all of the other variables in the system.11 Backward integration is a strategic move to reduce costs or protect the manufacturing firm from supplier exploitation.12 Each dependent intermediate production activity can provide information about price and ' material availability to the other production activities.13 The accessibility of such information allows the firm to adjust all of its other activities through integrated decisions on f irm-wide production levels and capital investments. However, uncertainty about final demand may lead to a perturbation of the entire system through expensive idle capacity of the integrated f irm.14 llAshby, op. cit., pp. 148-157. 12M.E. Porter, Campetitive Strategy (New York: The Free Press, 1980), pp. 122-123; see also A.A. Meitz and BB. Castleman, "How to Cope with Supply Shortages," Harvard Business Review, January-February 1975, p. 96; see also Hayes and Wheelwright, op. cit., p. 275. 13KJ. Arrow, "Vertical Integration and Communication,” Bell learnal ef Eeenemies, Spring 1975 pp. 173-174; see also D.W. Carlton, ”Market Behavior with Demand Un- certainty and Price Inflexibility," Ameriean Eeenemie Review, September 1978, pp. 582-585; see also D.W. Carlton, ”Uncertainty, Production Lags, and Prices, Ameriean Eeenemie Review, February 1977, p. 248. l4Arrow, op. cit., pp. 173-174. 6 Extending Ashby’s concept of a ”fully joined system"15 to the purchasing behavior of an integrated manufacturing firm, the following descriptive model of a ”fully coupled buyer/seller relationship" was developed: . Acquires goods and services from an internally integrated source of supply. . Manages the source of supply for the benefit of the total firm. . Resolves disputes through managerial tradeoffs. . Exchanges mutual information with the source of supply. . Adjusts concurrently to operating and marketplace conditions. A manufacturing firm may also acquire raw materials and components by limiting its supply base to one or a few preferred suppliers and allowing them access to its operating system. A similar situation is present in living systems when two independent systems allow each other access to certain variables in the other’s system.16 This type of buyer/seller relationship lies between loosely coupled and fully coupled. buyer/seller relationships. On the one hand, it is similar to a fully coupled buyer/seller relationship since both encourage the acquiring firm and the source of supply to behave cooper- atively when unforeseen contingencies develop, with a joint-profit maximization em- phasis.l7 On the other hand, the buying firm does not own the production activities as is also the case in a loosely coupled buyer/seller relationship. This intermediate type of buyer/seller relationship is being used by US. manufac- turing firms to improve their supplier’s productivity as well as their own, and to reduce their response time to market demands.18 For example, by initiating this type of lsAshby, op. cit., p. 148. 16Glassman, op. cit., pp. 89-91. l7Williamson, op. cit, p. 91. 181 . Bohn, ”Supplier Relationships Changing," Basiness Marketing, December 1983, p. 9; see also T. Drozowski, "At GM, They’ve Got Young Car Buyers in Mind," W, November 7, 1985, pp. 67-71; see also T. Drozowski, "Purchasing At GM Restyles For The 90’s," Parehasing, October 24, 1985, pp. 56-60. 7 buyer/seller relationship, Ford Motor Company was able to help a supplier reduce its rejection rate of purchased relays from 40 percent to less than one percent within eight months. This raised production from 3,000 relays per line per shift to as much as 6,000 and cut the supplier’s manufacturing costs by 20 percent.19 In another example, Xerox Corporation was able to reduce its copier costs by 10 percent every year from 1980 to 1985 by working with its suppliers.20 However, this type of buyer/seller relationship usually loses flexibility because there is an increased dependence on a preferred supply or customer pool. A preferred supply pool does not allow the buying firm to maximize its objectives by playing one supplier off against another. Therefore, to stay viable, both separately and jointly, the buying and selling firms must cope collectively with environmental changes, and provide information on their activities which may impinge on or affect the other’s operating system.21 The third model of purchasing behavior is based on Glassman’s concept, Pfeffer and Salancik’s concepts, and the intermediate buyer/seller relationship discussed above. This third model is identified as a "tightly coupled buyer/seller relationship," and differs from the other two models as follows: . Acquires goods and services from one or a few preferred suppliers. . Works with suppliers to improve productivity and to lower overall costs. . Resolves disputes through joint problem solving efforts. . Exchanges reciprocal operating information with the suppliers. - Adjusts jointly to operating and marketplace conditions. l9L. Adkins and W. Diller, ”Industry’s Quiet Revolution,” Dan’s Business Menth, June 1983, pp. 72-75. 20E. Raia, ”Survival: Your Supplier Gives You More Than An Outside Chance,” Purehasing, December 5, 1985, p. 45. 21J. Pfeffer and GR. Salancik, The External Centre] ef Qrganigtiens; A Reseurce We (New York: Harper and Row Publishers, 1978), p. 145. ' 8 The characteristics of loosely coupled, tightly coupled and fully coupled buyer/sel- ler relationships are summarized in Figure H. The factors influencing the choice of loosely coupled and tightly coupled buyer/seller relationships, and the importance of certain source selection criteria when evaluating a potential supplier for these two buyer/seller relationships was assessed during the empirical research effort of this dissertation. Fully coupled buyer/seller relationships were not considered during the empirical research of this dissertation since independent buying and selling firms are not present. FIGURE I-1 CHARACTERISTICS OF BUYER/SELLER RELATIONSHIPS Loosely Coupled Tightly Coupled Fully Coupled Buyer/Seller Buyer/Seller Buyer/Seller Relationship Relationship Relationship Many Suppliers One or a Few Internally Suptgly P001 In a Competitive Preferred Integrated rze . . . Envrronment Suppliers Supplier Commitment Weak Stronger Strongest Dispute Unyielding Joint Problem Managerial Resolution Negotiations Solving Tradeoffs Exchange of . . Information Minimal Greater Greatest Marketplace - Adjustment Separate J ornt Concurrent 9 RESEARCH DIRECTION The three models offered in this chapter are descriptive and simple. Nevertheless, these models provided direction to the current research effort of investigating the decisions facing manufacturing firms when choosing buyer/seller relationships, and when evaluating a potential supplier for different buyer/seller relationships. Furthermore, the models should facilitate future investigation into: 1. Recognizing the factors involved in the choice of a buy- er/seller relationship, and which variables can be controlled to affect performance of the buying and selling firms, 2. Recognizing relevant costs and their magnitude, and 3. Identifying the relationship between costs and decision variables, and recognizing the important tradeoffs among costs. Specifically, the empirical research studied two decision junctures associated with buyer/seller relationships. The first decision juncture is the choice to use either a loosely coupled or tightly coupled buyer/seller relationship. The second decision juncture is the evaluation of a potential supplier for either a loosely coupled or a tightly coupled buyer/seller relationship. Therefore, the following two research quest- ions were asked: 1. What factors influence the choice to use either a loosely coupled buyer/seller relationship or a tightly coupled buy- er/seller relationship? 2. What source selection are important when evaluating a potential supplier for either a loosely coupled buyer/seller relationship or a tightly coupled buyer/seller relationship? As described earlier in this chapter, a ”Loosely Coupled Buyer/Seller Relationship" is synonymous with“ open marketing bargaining, and a "Fully Coupled Buyer/Seller Relationship" is equivalent to an integrated firm. A '"I‘ightly Coupled Buyer/Seller Relationship" lies somewhere between the other two buyer/seller relationships. It- achieves some of the benefits of a fully coupled buyer/seller relationship while main- 10 taining separate and independent enterprises as with a loosely coupled buyer/seller relationship. EMPIRICAL RESEARCH LIMITATIONS The empirical research conducted for this dissertation has certain limitations. This section will state these limitations, so that the reader may consider them while reading this dissertation. Since a questionnaire method was used to gather data regarding the two decision junctures associated with a buyer/seller relationship, the questionnaire is limited to those measures which were identified during its development. To mitigate this lim- itation, the measures were assessed for their relevance and validity during discussions with a number of purchasing professionals. A description of this procedure can be found in Chapter IV in the section entitled "Measures” (pp. 51-56). The questionnaire used for this research was lengthy, and required roughly 45 to 60 minutes to complete it, and approximately 7 percent of the sample provided usable data. Chapter IV (pp. 47-51) shows that this response rate provides a 96.24 percent level of confidence. Even though the empirical study was based on a random sample of purchasers employed in US. manufacturing firms, generalizations in this dissertation will only refer to the purchasers who responded to the questionnaire. Also, generalizations cannot be made for any specific industry since the industry data did not have a homogeneous variance. An important parametric assumption is that the scores are independent; that is, the score of any one dependent variable does not in any way affect the score of any other dependent variable. The questionnaire was designed to gather data on the influence of 39 factors on the choice of a buyer/seller relationship, and the importance of 39 source selection criteria when evaluating a potential supplier. Since the data were gathered from one questionnaire this assumption may have been violated. In other words, the 11 responses for a loosely coupled buyer/seller relationship may have affected the responses for a tightly coupled buyer/seller relationship, and vice versa. Another important parametric assumption is that the data be distributed normally. Chapter V (pp. 63—65) discusses the issue of normality as it affects the analyses of the data during the empirical research. To mitigate the problem of abnormally distributed data, the empirical research set the statistical rejection level at 0.01. The questionnaire also asked the respondents to indicate the influence of 39 factors on the choice of a loosely coupled and tightly coupled buyer/seller relationship, and the importance of 39 source selection criteria when evaluating a potential supplier for a loosely coupled and tightly coupled buyer/seller relationship. These questions assumed that the respondents did not acquire goods and/or services from "fully coupled buyer/seller relationships.” In practice, US. manufacturing firms may obtain some goods and/or services from vertically integrated operations. PREVIEW OF DISSERTATION Chapter 11 presents a review of previous buyer/seller relationship research, relevant decision-making literature, purchasing objective literature, and source selection criteria research. A Source Selection Criteria Decision Model was developed from the reviewed literature and research. This Model served as the foundation of the Buyer/Seller Relationship Decision Model assessed during the empirical research effort of this dissertation. Chapter III continues the review literature discussed in Chapter II as well as summarizes the interviews with purchasing executives, and the recommendations of the doctoral dissertation committee, which contributed to the development of the Buy- er/Seller Relationship Decision Model. Also Chapter 111 sets forth the conjectures associated with the Buyer/Seller Relationship Decision Model which underpin the empirical research of this dissertation. The Buyer/Seller Relationship Decision Model 12 differs from the Source Selection Criteria Decision Model as it includes the concepts of loosely coupled and tightly coupled buyer/seller relationships. Chapter IV presents the manner in which the conjectures associated with the Buyer/Seller Relationship Decision Model discussed in Chapter II were assessed for internal and external validity. Also presented are reasons for using a mail questionnaire survey design to gather empirical data, as well as the statistical considerations for the sample. The chapter goes on to explain the development of the measures used in the empirical research, and the statistical hypotheses to be tested in the research. Stat- istical techniques used to analyze the data are also discussed. Chapter V presents descriptive statistics and results of hypothesis tests. The descriptive statistics were calculated for the six data sets obtained during the empirical research of this dissertation: one set of industry representation data of the responding sample, two sets of influence ratings assigned to factors when choosing a buyer/seller relationship, two sets of importance ratings assigned to source selection criteria for different buyer/seller relationships, and one set of percentages of loosely coupled and tightly coupled buyer/seller relationships in US. manufacturing firms. The statistics describe the normality of five data sets (excluding the data set of industry repre- sentation) and the confidence levels associated with the variables. Normality limitations, and the confidence levels identified in Chapter V, were used to guide the interpretation of subsequent analyses. Finally, this chapter presents hypothesis testing which led to the acceptance or rejection of the null hypotheses stated in Chapter IV. Chapter VI presents the results of analyses to determine what patterns exist within four data sets obtained during the empirical research of this dissertation. First this chapter examines the significant and systematic differences between 39 factors as they (1) influence the choice of a loosely coupled buyer/seller relationship, and (2) influence the choice of a tightly coupled buyer/seller relationship. Next, the significant and systematic similarities and differences between the importance of 39 source selection criteria as they pertain to (1) the evaluation of a potential supplier for a loosely 13 coupled buyer/seller relationship, and (2) the evaluation of a potential supplier for a tightly coupled buyer/seller relationship are examined. Finally, a modification of the Buyer/Seller Relationship Decision Model is presented based on the research results. Chapter VII presents a summary of this dissertation and its implications. Specif— ically, this chapter summarizes the findings of the empirical research and the con- clusions drawn from this dissertation which assist in the understanding of buyer/seller relationships. This chapter goes on to state the implications of this dissertation to purchasing management; viz, the findings provide a standard which may be used by purchasing managers to judge their choice of different buyer/seller relationships, and recommendations of which source selection criteria are important when evaluating a potential supplier for different buyer/seller relationships. This chapter also states the implications of this dissertation to future purchasing research. Future buyer/seller relationship research directions are presented. CHAPTER 11 LITERATURE REVIEW1 This chapter presents a review of previous buyer/seller relationship research, decision-making literature, purchasing objective literature, and source selection criteria research. A Source Selection Criteria Decision Model was developed from the literature reviewed in this chapter. This model serves as the foundation for the Buyer/Seller Relationship Decision Model assessed during the empirical research effort of this dissertation. PREVIOUS BUYER/SELLER RELATIONSHIP RESEARCH Previous research into buyer/seller relationships has been conducted using two different perspectives. The first is an industrial marketing perspective which emphasizes the development of effective marketing strategies within different buyer/seller relation- ships. The second is a purchasing management perspective which describes the changes to the ”purchasing, process” caused by the different types of buyer/seller relationships. For example, Hakanson, Johanson and Wootz provided a classification of buying- selling situations based on three types of uncertainty facing buying firms, (1) need uncertainty, (2) market uncertainty, and (3) transaction uncertainty.2 The authors illustrated that, from these uncertainties, selling firms can develop effective marketing 1Chapter III also continues the review of literature presented in this Chapter. However, in Chapter III the literature review is used to develop the Buyer/Seller Relationship Decision Model. 2H. Hakanson, J. Johanson and B. Wootz, "Influence Tactics in Buyer-Seller Processes,” Ingestrial Marketing Management, December 1979, pp. 319-332. 14 15 strategies. In another study, DeBruicker and Summe investigated the effect of the product-life-cycle concept on buyer/seller relationships.3 They suggested that as a buying firm changes from an ”inexperienced generalist” to an "experienced specialist," the selling firm must adopt different marketing strategies to take advantage of the change. Ford emphasized the importance of buyer/seller relationships and "relationship management” in international industrial marketing.4 He indicated that price and product quality are important elements in industrial marketing; however, a substantial amount of variation in a buying f irm’s perception of a supplier’s technical and commercial skill is associated with the supplier’s adaptability to the needs of the buying firm, the working environment, the commitment of the firms to each other, and the manner in which conflicts are resolved between them. Ford suggested that industrial marketers should include these elements, along with price and product quality, when developing a relationship with a buying firm. Watson developed a stability matrix which can serve both buying and selling firms as a visual tool for testing assumptions about the stability of their buyer/seller relation- ships.5 He suggested that the stability matrix could be used to represent the positions, moves and prospects of the buying and selling firms, and lead to better decisions by both firms. Some research efforts have focused on Just-In-Time (JIT) manufacturing and its effect on buyer/seller relationships. Manoochehri suggested that JIT requires the development of a new relationship between the buying and selling firms as they change from a traditional competitive/cost attitude to a cooperative, "win-win” attitude.6 3F.S. DeBruicker and G.L. Summe, "Make Sure Your Customers Keep Coming Back," Harvard Basiness Review, January-February 1985, pp. 92-98. 4D. Ford, ”Buyer/Seller Relationships in International Markets, Ingestrial Marketing Management, May 1984, pp. 101-112. 5C.M. Watson, "Balancing Dominance: Diagnosing the Buyer-Seller Relationship," Easiness Herizens, September-October 1984, pp. 62-65. 6G.H. Manoochehri, "Suppliers and the Just-In-Time Concept," Jearnal ef Parehging and Materials Management, Winter 1984, pp. 16-21. l6 Schonberger and Ansari illustrated that purchasing activities in a JIT environment would result in a buyer/seller relationship which would enhance the quality of purchased items.7 Schonberger and Gilbert were primarily interested in the quality and produc- tivity benefits derived by cutting inventories through JIT purchasing.8 They described characteristics of JIT purchasing, compared typical U.S. purchasing tendencies with JIT purchasing tendencies, and suggested benefits of JIT purchasing to the buying firm. However, since recent practitioner publications9 have reported that some US. manufacturing firms are moving away from what has been identified in this dissertation as loosely coupled buyer/seller relationships to tightly coupled buyer/seller relationships, this dissertation will determine what factors influence a purchasing decision-maker to choose these buyer/seller relationships, and whether a purchasing decision-maker rationally evaluates a potential supplier differently for these buyer/seller relationships. 7R.J. Schonberger and A. Ansari, 'Just—In-Time Purchasing Can Improve Quality,” Jearaal ef Purehasing aria Materials Management, Spring 1984, pp. 2-7. 8R.J. Schonberger and J.P Gilbert, "Just-In-Time Purchasing: A Challenge for US. Industry," Qalifernia Management Review, Fall 1983, pp. 54-68. 9L. Adkins and W. Diller, ”Industry’s Quiet Revolution," Dun’s Business Menth, June 1983, pp. 72-75.; J. Bohn, "Supplier Relationships Changing,” Basiness Marketing, December 1983, p. 9.; RB. Crosby, "Supplier Audits Shouldn’t Be Used as Material Inspection Parties,” Earehasing, June 7, 1984, p. 100A27.; S. Dowst, "Just-In-Time Isn’t Just Inventory Reduction,” Parehasing, December 19, 1985, p. 27.; T. Drozowski, "At GM, They’ve Got Young Car Buyers in Mind," Earehasing, November 7, 1985, pp. 67-71.; T. Drozowski, ”Purchasing AT GM Restyles For The 90’s," Parehasing, October 24, 1985, pp. 56-60.; E. Raia, "Survival: Your Supplier Gives You More Than An Outside Chance," Parehasing, December 5, 1985, p. 45.; GS. Ruderman, ”Motorola’s Working Hard At Making Its Leverage Pay," Parehasing, June 7, 1984, pp. 100A18-100A21.; J.F. Russell, ”Small Staff Brings Lots of Savvy to Electronics Buying," Parehasing, November 7, 1985, pp. 74A12-74Al7.; A.J. Roger, ”How Miller Electric Buys Metals," Parehasing, July 25, 1985, pp. 51- 53.; T.Stundza, "Now’s the Time to Shed the ’We Buy, You Supply’ Attitude,” Parehasing, May 24, 1984, p. 34.; T.R. Temin, "Purchasing at AT&T Tech- nologies: Getting Ready for What’s Ahead,” Parehasing, May 10, 1984, pp. 82-89. l7 PURCHASING PROCESS DECISION-MAKING Several authors have developed conceptual models of the buying decision process in complex economic organizations.lo These models view the buyer as a rational decision- maker and suggest that information gathering is vital to the purchasing process. Using the gathered information, a rational purchasing decision-maker selects the alternative which will maximize the amount of output for a given input. Thus, a purchasing decision-maker will choose a buyer/seller relationship which will maximize the purchas- ing requirement. In a similar manner, a purchasing decision-maker will evaluate suppliers and select the supplier which will also maximize the purchasing requirement. Therefore, assuming that a purchasing decision-maker will choose a buyer/seller relationship rationally, the following choice process was adapted from Cyert, Simon and Trowll to illustrate this purchasing decision: 1. An individual purchasing decision-maker is confronted with a choice of buyer/seller relationships. 2. To each of these buyer/seller relationships is attached a set of consequences that will ensue when a relationship is chosen. 3. The individual purchasing decision-maker has a system of preferences or utilities that permit him to rank the consequences according to preference and to choose the relationship with the preferred consequences. loF.E. Webster, Jr. ”Modeling the Industrial Buying Process," learnal ef Marketing Researeh, November 1965, p. 370-376; F.E. Webster, Jr. and Y. Wind, Qrganization Buying Behavier (Englewood, New Jersey: Prentice-Hall, 1972), pp. 28-39; F.E. Webster, Jr. and Y. Wind, ”A General Model of Organizational Buyer Behavior," learnal ef Marketing April 1972, pp. 12-19. “RM. Cyert, H.A. Simon and DD. Trow, ”Observations of a Business Decision," learnal ef Easiness October 1956, pp. 237-248. 18 Again, assuming that a purchasing decision-maker will evaluate a supplier ra- tionally, the following choice process was also adapted from Cyert, Simon and Trow12 to illustrate this purchasing decision: 1. An individual purchasing decision-maker is confronted with a choice between a number of potential suppliers. 2. To each of these potential suppliers is attached a set of consequences that will ensue when one particular supplier is chosen for a specific buyer/seller relationship. 3. The individual purchasing decision-maker has a system of preferences or utilities that permit him to rank the consequences according to preference and to select the supplier with the preferred consequences. The individual purchasing decision-maker is confronted with a number of con- sequences during the choice of a buyer/seller relationship, and the evaluation of a supplier. The consequences of choosing a buyer/seller relationship, or selecting a particular supplier, affect the objectives established by the purchasing function. Some of the general purchasing objectives, which may be considered by the purchasing decision-maker during these two decision junctures, are as follows: 1. Ensuring adequate dependable sources of supply for materials, supplies, equipment, and designated services procured by the [purchasing] department while maintain- ing an optimum balance of quality, utility, and cost. 2. Maximizing purchasing strengths in the marketplace to obtain most favorable terms and conditions of purchase. 3. Contributing to maximum corporate profitability through judicious and ethical buying of raw materials, equipment, supplies, and designated services. 4. Developing and applying sound purchasing principles, practices, and techniques to the [purchasing] function. 12Cyert, et. al., loc. cit., pp. 237-248. 19 5. Developing and maintaining a competent purchasing staff and managing company-wide procurement activities to achieve the lowest cost to adequately carry out the [purchasing] function. 6. Contributing to improved management decision making through development and maintenance of information services in the areas of (1) new items and services, (2) market demands, (3) new sources, (4) price fluctuation and trends, (5) equipment design changes, and (6) new materials and methods. 7. Promoting a positive company image among vendors and the general public. 8. Establishing and maintaining equitable and mutually profitable relationships with suppliers. 9. Cooperating with other company management to promote the best interests of the corporation. 10. Developing and implementing contractual safeguards which clearly establish responsibility for warranting of design, materials, workmanship, performance, and patents for all purchased materials, goods, and services. 11. Optimizing investment in purchased material inventories through cooperative and supportive activity with operat- ing departments. 12. Minimizing total delivered costs through management and control of in-bound transportation, in cooperation with traffic and distribution departments. 13. Using internal sources of supply when this is to the advantage of the company. 14. Maximizing investment recovery through judicious scrap and surplus disposal. 15. Contributing to the orderly development and implementa- tion of a materials management concept in the com- pany.1 Therefore, an individual purchasing decision-maker, who is either choosing a buyer/seller relationship or evaluating a supplier, will gather appropriate information 13R.M. Monczka, P.L. Carter, and J.H. Hoagland, Parehasing Perfermanee; Measure- ment ang Central (East Lansing, Michigan: Division‘of Research, Graduate School of Business Administration, 1979), pp. 41-42. 20 before making the decision. The information will assist the purchasing decision-maker to rank the consequences to the purchasing objectives, and then choose the buyer/seller relationship, or the supplier, with the preferred consequences. Previous research has concentrated on the criteria used to evaluate and select a supplier. SOURCE SELECTION CRITERIA LITERATURE An early study into source selection criteria surveyed 273 purchasing agents.14 The purchasing agents were asked to read four source selection cases concerning the purchase of paint, desks, a computer, and art work, and place themselves in the position of the purchasing agent responsible for evaluating a supplier. Then the purchasing agents were asked to rate the importance of 23 different source selection criteria for each case. This study concluded that three factors were crucial in the evaluation of a supplier in all four cases: the ability to meet quality standards, the ability to deliver the product on time, and the supplier’s performance history. However, the importance placed on the criteria varied according to the product being purchased. In a questionnaire survey study, 216 randomly selected purchasing managers were asked to rank the influence of supplier characteristics in the purchase of semicon- ductors, bearings, hydrochloric acid, sulfuric acid, sheet plastic, fasteners, and machine lubricants.” This study found that the source selection criteria used to evaluate a supplier varied according to product type. The most important criteria were product quality, physical distribution services, price, supplier management, distance from purchaser, required order size, minority/small business, and reciprocity. A survey of 379 purchasing managers in electric utilities and electronics manufac- turing firms was used to investigate the importance placed on supplier attributes when l4G.W. Dickson, "An Analysis of Vendor Selection Systems and Decisions," Jearnal ef Earehasing February 1966, pp. 5-17. 15W.D. Perreault and F.A. Russ, "Physical Distribution Service in Industrial Purchase Decisions," ,[eurnal ef Marketing, April 1976, pp._3-10. 21 buying a modified rebuy item and a new-buy item.l6 Specifically, the purchasing managers were asked to assess the importance of supplier attributes and buyer informa- tion sources in connection with the purchase of capital equipment (a new-buy task) and component material (a modified rebuy task). This study concluded that the relative importance of the individual supplier attributes differed depending on whether the purchase item was a new-buy or a modified rebuy task. A factor analysis was then used to determine the fundamental evaluation criteria for both buying tasks. The most important source selection criteria were identified as (l) supplier stability, (2) basic economics, (3) geographic affinity, (4) attendant service, and (5) assurance mechanisms. A survey was used to determine the importance of sixty source selection criteria when purchasing two general product categories, "standard” and ”special.” Based on a response of 199 educational buyers, this study concluded that only eight source selection criteria were important and common to both "standard" and "special” products. There- fore, the use and importance of source selection criteria was dependent on the product type. A survey of 220 randomly selected purchasers was used to determine the relative importance of the following five source selection criteria,18 1. Product performance (the extent to which the product was likely to maximize performance in its application). 2. Economic (the anticipated cost outlay associated with buying, storing, using, and maintaining the product). 3. Integrative (the willingness of the supplier to cooperate). 16W.A. Dempsey, ”Vendor Selection and the Buying Process,” Industrial Marketing Management, 1978, pp. 257-267. l7C.P. Rao and GE. Kiser, ”Educational Buyers’ Perception of Vendor Attributes,” Jeurnal at: Parehasing and Materials Managemeat, Winter 1980, pp. 25-30. 18D.R. Lehmann and J. O’Shaughnessy, "Decision Criteria Used in Buying Different Categories of Products," Jeurnal ef Purehasing ana Materials Management, Spring 1982, pp. 9-14. 22 4. Adaptive (the ability to meet the buyer’s requirements of quantity and delivery). 5. Legalistic (the constraints of government regulations, company policies and practices, etc.). The 220 purchasers provided information on the importance of these five source selection criteria when evaluating potential suppliers of the following eight contrived product-types, 1. Standard product with a simple composition and con- figuration, standard application and low dollar expendi- ture. 2. Standard product with a complex composition and configuration, novel application and high dollar expendi- ture. 3. Non-standard product with a simple composition and configuration, novel application and high dollar expendi- ture. 4. Non-standard product with a complex composition and configuration, standard application and low dollar expenditure. 5. Standard product with a simple composition and con- figuration, standard application and high dollar expendi- ture. 6. Standard product with a complex composition and configuration, novel application and low dollar expend- iture. 7. Non-standard product with a simple composition and configuration, novel application and low dollar expend- iture. 8. Non-standard product with a complex composition and configuration, standard application and high dollar expenditure. Based on the responses of the 220 purchasers, this study concluded that all five source 0 0 O . O O 0 selection criteria were used and that economic criteria and product performance were 23 the most important. Furthermore, this study suggested that product types influenced the source selection criteria used by the purchasers. Buying game experiments have also been used to investigate supplier choice by industrial purchasers. In one study, a probability sample of 64 Twin Cities Purchasing Management Association members was used.19 This study used eight contrived purchase decision cases which varied in risk by total dollar value of the requisition, the com- plexity of the purchased commodity, the buyer’s visibility, and the consequences of choosing an unacceptable supplier. The 64 subjects were asked to read each case and to select up to five bidders from a directory of 160 possible sources. The subjects were then provided with a contrived quotation from the selected bidders. However, this experiment only considered the following six source selection criteria for evaluating the potential supplier: l. The suppliers were either well known or unfamiliar to the buyer. 2. The suppliers had either prior relationships with the buying firm or none. 3. The suppliers stressed low price products. 4. The suppliers stressed the ability to meet product specifications. 5. The suppliers stressed prompt delivery to the buyer. 6. The directory either provided high or low amounts of information on the suppliers. l9R.N. Cardozo and J.W. Cagley, ”Experimental Study of Industrial Buyer Behavior,” Jeurnal ef Marketing Researeh August 1971, pp. 329-334. 24 This experiment concluded that the source selection criteria used to evaluate a potential supplier were influenced by the amount and type of risk associated with the purchasing situations which were, in turn, affected by the purchase requirement. In another buying game research project 14 industrial buyers were asked to state their decision-making procedures for a hypothetical purchasing situation.20 The situation involved the purchase of a medium cost (approximately $5.00) rebuy electronic component. The investigators constructed deterministic models of the choice strategy used by experienced industrial buyers both in evaluating suppliers from whom to request quotations, and in deciding on a final supplier. The deterministic models were based on an elimination of ”unworthy" suppliers in a non-compensatory fashion. This study concluded that the basic structure of the choice strategies may remain relatively stable for components purchases within the modified rebuy context. However, in another similar study, twelve industrial buyers were asked to determine differences in supplier evaluation for a new-buy task.21 Each buyer was to assume that he or she was responsible for the purchase of electronic components needed in the production of a new microwave oven by a medium-size kitchen appliances manufacturer. This study found that in a new-buy task, the buyer did not have a standard priority rule for delivery, quality, or technical assistance. These studies suggested that product types, whether modified rebuy or new buy, influenced the source selection criteria used by the purchasing decision—make. 2OLE. Crow, R.W. Olshavsky, and 1.0 Summers, "Industrial Buyers’ Choice Strate— gies: A Protocol Analysis,” Jeurnal ef Marketing Researeh, April 1980, pp. 34-44. 21L.E. Crow and JD. Lindquist, "Buyers Differ In Evaluating Supplier,” Industrial Mgketing Management, 1982, pp. 205-214. 25 SIJIVIhd/\I{l{ ()FiIRJEIIIISVVIEI) IIIITSIt/XIFIJIKIS In summary, the reviewed source selection criteria research literature suggests that purchase requirement types influence the importance assigned to source selection criteria when evaluating a potential supplier. Figure II-l illustrates this by showing that the purchasing decision-maker will decide on a set of source selection criteria which are consistent with the purchase requirement. The source selection criteria allow the purchasing decision-maker to select a supplier with the preferred consequences for the purchase requirement. Since past source selection criteria research has used product types as independent variables, the Source Selection Criteria Decision Model (Figure II-l) was inadequate for the empirical research of this dissertation because it does not consider the type of FIGURE II-l SOURCE SELECTION CRITERIA DECISION MODEL Source Selection Criteria Pool Product Orientation Select Award Supplier Contract 26 relationship between the buying and selling firms. Nevertheless, the Source Selection Criteria Decision Model does serve as the basis for the Buyer/Seller Relationship Decision Model which underpins the empirical research. The Buyer/Seller Relationship Decision Model is described in Chapter 111. Chapter III also continues the review of literature presented in this Chapter; however, in Chapter III the literature review is used to develop the Buyer/Seller Relationship Decision Model. CHAPTER III BUYER/SELLER RELATIONSHIP DECISION MODEL This chapter presents the Buyer/Seller Relationship Decision Model (Figure III-l) used in the empirical research aspect of this dissertation. The model is based on a review of practitioner literature,l interviews with several purchasing executives employ- ed by two Fortune 500 electronic manufacturing firms, and recommendations of the doctoral dissertation committee. The Buyer/Seller Relationship Decision Model uses the Source Selection Criteria Decision Model (Figure II-l) which was developed from 'a review of source selection criteria literature in Chapter II. The Buyer/Seller Re- lationship Decision Model differs from the Source Selection Criteria Decision Model by its inclusion of loosely coupled and tightly coupled buyer/seller relationships. The Buyer/Seller Relationship Decision Model (Figure III-l) consists of two sections. The first section of the model illustrates that once the purchasing decision- maker identifies the orientation of the purchase requirement, the purchasing objectives of the buying firm, the characteristics of the possible suppliers, and the characteristics of the supply market, a choice is made to use either a loosely or a tightly coupled buyer/seller relationship. The second section of the model illustrates that after choosing a buyer/seller relationship, the purchasing decision-maker will then evaluate a lP.B. Crosby, "Suppliers Audits Shouldn’t Be Used as Material Inspection Parties," Purehasing, June 7, 1984, p. 100127; A.J. Roger, "How Miller Electric Buys Metals," Purehasing, July 25, 1984, pp. 51-53; G.S. Ruderman, ”Motorola’s Working Hard at Making Its Leverage Pay,” Parehasing, June 7, 1984, pp. 100Al8-100A21; T. Stundza, ”Now’ 5 the Time to Shed the ’We Buy, You Supply’ Attitude, Parehasing, May 24,1985, p. 34; T. R. Temin, ”Purchasing at AT&T Technologies. Getting Ready for What’s Ahead, " Parehasin n,g May 10, 1984, pp. 82- 89. 27 28 awn—OZ ZOE—Omn— m—EwZO—P3m _u=— mdDO—n— q_zm==_nmfim¢ am_~mm\am>=m negaaou >_Lcmflh flog; mflamuwag a” mac” m m cofluumfimm .: .L H z muaacm szmcoLLm_m¢ amHHmm\Lm>=m umfinacu >-m==4 Hagan: >Haa=m may Lo uflymwamnumamzu mamwfiaa=m mfiaflmmoa mca he mowumflamyumamgu mm>LLum_n= acmmmcoaaa ccwumucmwac Hamsmafl==mm mmmguaaa N N \ \ 29 potential supplier by using the source selection criteria appropriate for either a loosely coupled or a tightly coupled buyer/seller relationship. FACTORS INFLUENCING THE BUYER/SELLER RELATIONSHIP Purchase requirement factors (Figure III-2) influence the choice of buyer/seller relationship in addition to determining the source selection criteria used to evaluate a potential supplier.2 Specifically, the product type, the process technology used to produce the product, the application of the product, the length of time the purchased product is needed, and the annual dollar commitment, would all influence the choice of buyer/seller relationship. For example, the purchase requirement may be an industry standard (e.g., an off -the-shelf electronic component) or a custom-made product (e.g., a specially designed electronic component). The production process for producing the purchase requirement may be simple (e.g., commercial stainless steel, a machined part) or complex (e.g., exotic stainless steel, sub-assembly). The purchase requirement may have a non-critical application (e.g., commercial fasteners) or critical application (e.g., newly designed component). The annual dollar commitment for the purchase requirement may be high or low relative to the buying firm’s dollar purchases. Also, the need for the purchase requirement may be of short or long duration. Based on the interviews, it was conjectured that a purchase requirement would favor the choice of a tightly coupled buyer/seller relationship when it is a custom-made product, manufactured by complex process technology, used for a critical application, required for a long duration, or expected to have a high annual dollar commitment relative to the f irm’s annual dollar purchases. The reasoning behind these conjectures was that the buying firm would need to work closely with one or a few suppliers to mitigate possible perturbation of its operating system. On the other hand, a purchase requirement which is an industry standard, manufactured by a simple production process, 2The inclusion of purchase requirement factors is based on interviews with purchasing executives at two Fortune 500 manufacturing firms. 30 FIGURE III-2 PURCHASE REQUIREMENT ORIENTATION INFLUENCING FACTORS Product Type/ ° Custom-made . Industry Standard Process I Technology . Simple . Complex Product / Application - Non-critical - Critical 1 Purchase Requirement Orientatio Duration of Need - Short ° Long Dollar Expenditure ° Lou ° High \ 31 used for a non-critical application, required for a short duration, or expected to have a low annual dollar commitment relative to the f irm’s annual dollar purchases, would favor the choice of a loosely coupled buyer/seller relationship. The choice of a loosely coupled buyer/seller relationship was conjectured since the buying firm’s operation is not apt to be adversely affected by a purchase requirement of this type. The buying firm would not need to work closely with one or a few suppliers, and it could purchase the requirement from any supplier in a wide supply pool to take advantage of a quoted lower price, better delivery, higher quality, etc. Recommendations of the doctoral dissertation committee, and a review of practi- tioner literature,3 suggested the inclusion of the purchasing objectives of the buying firm as influencing factors on the choice of buyer/seller relationship (Figure III-3). It was conjectured that if a buying firm, had certain specific purchasing objectives, they would influence the choice of a tightly coupled buyer/seller relationship rather than a loosely coupled one. The empirical research of this dissertation includes the following purchasing objectives: reducing costs associated with the purchased products or items, improving quality of purchased products or items, obtaining process technology and innovations from suppliers, obtaining product technology and innovations from suppliers, reducing inventory levels of purchased products or items, and contributing to the reduction of the time interval from product design to availability of the finished goods to the final customer. The interviews with purchasing executives also indicated that characteristics of the possible suppliers (Figure III-4) would influence the choice of either a tightly coupled or a loosely coupled buyer/seller relationship. Specifically, the interviews led to the conjectures that past experience with the possible supplier’s delivery performance, the supplier’s price history, the level of confidence the buying firm had in the supplier’s product quality, and the production process used by a possible supplier, would also 3Crosby, loc. cit.; Roger, loc. cit.; Ruderman, loc. cit.; Stundza, loc. cit.; Temin, loc. cit. 32 FIGURE III-3 PURCHASING OBJECTIVES OF THE BUYING FIRM INFLUENCING FACTORS Reducing 1, Costs 1" Improving l, Ouality i, Obtaining Process \ Obtaining Product Technology 8 Innovations Technology 8 Innovations 1' Reducing 1, Inventory Levels 1, Reducing Design to Finish-good Cycle Time 1, > Purchasing Objectives 33 FIGURE III-4 CHARACTERISTICS OF THE POSSIBLE SUPPLIERS INFLUENCING FACTORS Delivery Performance History 0 None 0 Unsatisfactory 0 Satisfactory Price History o N009 o Unsatisfactory ° Satisfactory Information Financial 1, Characteristics of the 0 Unknown J ’ O . Poor Condition Possible ' Strong Conditi Suppliers Duality Performance History 0 None - Unsatisfactory ' Satisfactory _._ Process Technology 0 Unknown 0 Simple 0 Complex 34 influence the choice of a buyer/seller relationship. The doctoral dissertation committee also suggested that the financial strength of the possible suppliers would also influence the choice of the buyer/seller relationship. Specifically, it was conjectured that successful past experience with the possible suppliers’ delivery performance, satisfaction with their prices, confidence in their ability to produce products of high quality, their use of a complex production process, and a supplier’s strong financial condition, would favor the choice of a tightly coupled buyer/seller relationship. Conversely, unsuccessful or no experience with the possible suppliers’ delivery performance, unsatisfactory or no price history, little confidence in their product quality or no information on their quality performance, their use of a simple production process or no information on their production process, and no financial condition information or a supplier’s weak financial condition, would favor the choice of a loosely coupled buyer/seller relationship. Discussions with the doctoral dissertation committee also led to the inclusion of factors related to the supply market (Figure III-5). Specifically, these factors are concerned with the number of possible suppliers in the supply market, the rate of technological changes in the supply market, and the general economic condition of the supply market. It was conjectured that the existence of one or a few possible suppliers in the supply market would lead a buying firm to choose a tightly coupled buyer/seller relationship. The choice of this type of buyer/seller relationship would help insure a continuity of supply from a small supply base. However, if numerous suppliers are available, the buying firm might choose a loosely coupled buyer/seller relationship, since it would be able to play one supplier off against another to gain an advantage in the purchasing situation without sacrificing continuity of supply. It was also conjectured that numerous technological changes in the supply market would lead to the choice of a tightly coupled buyer/seller relationship since the buying firm would want to work closely with the possible suppliers to obtain technological advancements. However, few technological changes would favor the choice of a loosely coupled buyer/seller relation- ship since the buying firm may not rely on the accessibility of technological advance- 35 FIGURE III-5 CHARACTERISTICS OF THE SUPPLY MARKET INFLUENCING FACTORS Supply Market Composition . One or a Few Suppliers - Numerous Suppliers Technological Advancements oFEH Characteristics of the . Numerous > Supply Market Product Demand - Decreasing . Increasing Product Supply . Increasing . Decreasing 36 ments. It was also conjectured that, if the demand was increasing for products available from the supply market, a tightly coupled buyer/seller relationship would be chosen. However, a loosely coupled buyer/seller relationship would be chosen if demand was decreasing. In a similar vein, it was conjectured that if the availability of products in the supply market was decreasing, a tightly coupled buyer/seller relationship would be chosen. However, a loosely coupled buyer/seller relationship would be chosen if products were becoming more available. Thus, the buying firm would be able to take advantage of supply market conditions for the given purchasing situation. SOURCE SELECTION CRITERIA AND BUYER/SELLER RELATIONSHIPS In the Source Selection Criteria Decision Model (Figure III-l), purchasing decision- makers use source selection criteria to evaluate potential suppliers. However, in the Buyer/Seller Relationship Decision Model, the purchasing decision-maker uses source selection criteria appropriate for the chosen buyer/seller relationship. This section sets forth conjectures that certain source selection criteria are more important when evaluating a potential supplier for a loosely coupled buyer/seller relationship than a tightly coupled one, and vice versa. Previous research suggested that lowest price, required quality and best possible lead-time are of salient importance when evaluating a potential supplier.4 Since U.S. 4G.W. Dickson, "An Analysis of Vendor Selection Systems and Decisions," learnal ef Purehasiag, February 1966, pp. 5-17; R.N. Cardozo and J.W. Cagley, "Experimental Study of Industrial Buyer Behavior," ,[earaal ef Marketing Researeh, August 1971, pp. 329-334; W.D.Perreault and F.A. Russ, ”Physical Distribution Service in Industrial Purchase Decisions," Jearnal ef Marketing, April 1976, pp. 3—10; J.P. Kelly and J .W. Coaker, "The Importance of Price as a Choice Criterion for Industrial Purchasing Decisions," Ingestrial Marketing Journal, 1976, pp. 281-293; W.A. Dempsey, ”Vendor Selection and the Buying Process," In ri l M rk in M n m n , 1978, pp. 257-267; C.P. Rao and GE. Kiser, ”Educational Buyers’ Perceptions of Vendor Attributes,” learnal 9f Parehasing ant; Materials Management, Winter 1980,.pp. 25-30; L.E. Crow, R.W. Olshavsky and 1.0. Summers, "Industrial Buyers’ Choice Strategies: A Protocol Analysis," learnal ef Market- ing Research, April 1980, pp. 34-44; L.E. Crow and JD. Lindquist, "Buyers Differ in Evaluating Suppliers," Iagustrial Marketing Management, 1982, pp. 205-214; D.R. Lehmann and J. O’Shaughnessy, ”Decision Criteria Used in Buying Different Categories of Products, " learnal ef Parehasing and Matetials Management, Spring 1982, pp. 9-14. 37 firms have historically relied on loosely coupled relationships,5 it was conjectured that these three source selection criteria would be of importance when evaluating a potential supplier for a loosely coupled buyer/seller relationship. There is no evidence, however, to suggest that a quote of the lowest price, the required quality, and the best possible lead-time will not also be important in the evaluation of a potential supplier for a tightly coupled buyer/seller relationship. Therefore, it was also conjectured that these three source selection criteria would be important when evaluating a potential supplier for a tightly coupled relationship. Other source selection criteria concern activities of the potential supplier which may affect the buying firm. For example, a buying firm could maintain higher levels of inventoriesé to counter the effect of inconsistent quality,7 erratic delivery perform- ances,8 unsuitable equipment and/or unavailable production time.9 Alternatively, the buying firm could use certain source selection criteria to evaluate a potential tightly coupled supplier to minimize its purchased inventory levels without affecting its operations and operating capital. Therefore, it was conjectured that source selection criteria concerning activities of the potential supplier which may affect the buying firm, would be important when evaluating a potential supplier for a tightly coupled buy- er/seller relationship. The review of the previous source selection literature identified several source selection criteria which could aid a purchasing decision-maker to evaluate a potential 5R.H. Hayes and SC. WheelWright, Restering Qar Qampetitive Egge: Campeting Threugh Manafaeturing (New York: John Wiley and Sons, 1984), p. 297. 6R. Peterson and E.A. Silver, meisien Systems fer Inventery Management and Produetion Systems (New York: John Wiley and Sons: 1979), p. 65. 7GE. Inman and R. Schoenberger, "Selecting Source of Supply," in RV. Farrell (ed.), Aljian’s Purehging Hangeeek (New York: McGraw-Hill Book Company: 1982), pp. 6-15; D.W. Dobler, L. Lee and D.N. Burt, P r h in n M ri 1 Mana m it (New York: McGraw-Hill Book Company: 1984), p. 116. 8Inman and R. Schoenberger, loc. cit., pp. 6-15; D.W. Dobler, et. al., loc. cit., p. 116. 9Inman and R. Schoenberger, loc. cit., pp. 6-15; D.W. Dobler, et. al., loc. cit., p. 116. 38 supplier’s possible affect on the buying firm because of issues related to quality, delivery/availability, and production capacity. Specifically, the three quality related source selection criteria which were ident- ified during the literature review are included in the source selection criteria pool of the Buyer/Seller Relationship Decision Model. These criteria are: provides quality control performance information,10 provides product warranties,11 and provides repair services.12 The doctoral dissertation committee recommended that two more quality related source selection criteria should be included, namely, uses statistical process control, and has had few in-coming inspection rejections. Since these source selection criteria are concerned with the performance and attributes of the potential supplier, it was conjectured that these criteria will be more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship than for a loosely coupled one. Six source selection criteria pertaining to delivery and availability issues were identified during the literature review: provides "rush" deliveries,l3 provides frequent 14 provides on-time deliveries,ls maintains a plant or warehouse near the deliveries, buying firm,16 advises of product unavailability,l7 and provides special handling.18 If a manufacturing firm depends on these supplier capabilities, a tightly coupled buyer/seller relationship may be chosen, because the buying firm would suffer adverse affects if its loDempsey, loc. cit.; Dickson, loc. cit. llDickson, loc. cit.; Rao and Kiser, loc. cit. 12Dempsey, 10c. cit.; Dickson, loc. cit.; Rao and Kiser, loc. cit. 13’Cardozo and Cagley, loc. cit.; Perreault and Russ, loc. cit.; Rao and Kiser, loc. cit. 14Rao and Kiser, loc. cit. l5Perreau1t and Russ, 10c. cit.; Rao and Kiser, loc. cit. l6Dempsey, loc. cit.; Dickson, loc. cit.; Kelly and Coaker, loc. cit.; Perreault and Russ, loc. cit.; Rao and Kiser, loc. cit. 17Rao and Kiser, loc. cit. 18Rao and Kiser, loc. cit. 39 supplier failed in any of these areas. Therefore, it was conjectured that these source selection criteria would be important when evaluating a potential supplier for a tightly coupled buyer/seller relationship. Source selection criteria related to production capacity were also identified during the review of previous research. Specifically, three criteria were identified which dealt directly with the potential supplier’s production capacity, namely, has the ability to expand production capacity,19 updates production capacity availability,20 and provides ”on-going" production status.21 Since carrying inventories can be viewed as stored capacity,22 the source selection criteria of providing f inished-goods inventory status,23 and providing a family of products,24 are also included in the source selection criteria pool of the Buyer/Seller Relationship Decision Model. Additionally, the doctoral dissertation committee recommended that the criterion of having available production capacity be included. The conjectures associated with production capacity predicted that these source selection criteria would be important when evaluating a potential supplier for a tightly coupled buyer/seller relationship since these capabilities should allow the buying firm to reduce its inventory without suffering adverse affects to its operating system. Other source selection criteria come into play when a manufacturing firm chooses a tightly coupled relationship since it will have to cooperate with its supplier using a joint-profit maximization emphasis.25 Therefore, the buying and selling firms need to 19Rao and Kiser, loc. cit. 20Dickson, loc. cit.; Dempsey, loc. cit.; Lehmann and O’Shaughnessy, loc. cit. 21Dickson, loc. cit.; Dempsey, loc. cit.; Lehmann and O’Shaughnessy, loc. cit. 221111. Hayes and so. Wheelwright, loc. cit., p. 50. 23Dempsey, loc. cit. 24Rao and Kiser, loc. cit. 250.13. Williamson, k 11 Hi r r hi ' An 1 i n An i r Im 1i (New York: The Free Press: 1975), p. 91. 40 deal collectively with changes in their environments. Thus, it was conjectured that this set of source selection criteria will be important when evaluating a supplier for a tightly coupled buyer/seller relationship. This set of source selection criteria may be categorized into three groups, supplier management, technical capabilities, and economic issues. Six source selection criteria related to the management of the supplier were identified during the literature review: providing a labor relation record free of strikes or work-stoppages,26 adapting to specific needs of the buying firm,27 providing techni- cal field services,28 cooperating when unforeseen difficulties occur,29 helping in overcoming the buying firm’s errors,30 and helping in emergency situations.31 In addition to the source selection criteria used in previous research, the doctoral disserta— tion committee recommended the inclusion of having a capable management team, having productivity improvement potential, having a cooperative business philosophy, antici- pating future purchase requirements, and having a helpful sales force. All these source selection criteria would allow the buying firm to deal with changes in its operating environment during the course of a buyer/seller relationship; therefore, it was con- jectured that these source selection criteria were important when evaluating a supplier for a tightly coupled buyer/seller relationship. A potential supplier may also be evaluated on the basis of its technical capabil- ities.32 The source selection criteria pool of the Buyer/Seller Relationship Decision Model, therefore, includes the criteria of performing research and development on its 26Dickson, loc. cit.; Dempsey, loc. cit.; Rao and Kiser, loc. cit. 27Rao and Kiser, loc. cit. 28Rao and Kiser, loc. cit. 29Rao and Kiser, loc. cit. 30Rao and Kiser, loc. cit. 31Rao and Kiser, loc. cit. 32Rao and Kiser, loc. cit. 41 products and processes.33 Also included in the pool are two source selection criteria recommended by the doctoral dissertation committee which concern two relatively new technical capabilities of a potential supplier, bar-coding and electronic-data-interchange (EDI). These source selection criteria would allow the buying firm to deal with changes in the technical and operating environment during the course of a buyer/seller relation- ship; therefore, it was conjectured that this group of source selection criteria will be important when evaluating a supplier for a tightly coupled buyer/seller relationship. Finally, the review of previous source selection criteria research indicated that additional criteria related to economic issues, besides the lowest quoted price, should also be included.34 Therefore, the source selection criteria of having a sound financial condition, providing manufacturing cost information, and providing price guarantees were included in the source selection criteria pool. These source selection criteria would allow the buying firm to deal with possible changes in the economic environment during the course of a buyer/seller relationship; therefore, it was conjectured that this group of source selection criteria would be important when evaluating a supplier for a tightly coupled buyer/seller relationship. Figure III-6 summarizes the source selection criteria pool of the Buyer/Seller Relationship Decision Model. The thirty-nine source selection criteria found in Figure III-6 were assessed in this dissertation to determine their importance when evaluating a potential supplier for a loosely coupled and a tightly coupled buyer/seller relationship. 33Dickson, loc. cit.; Dempsey, loc. cit.; Rao and Kiser, loc. cit. 34Crow and Lindquist, loc. cit.; Crow Olshavsky and Summers, loc. cit.; Dempsey, loc. cit.; Dickson, loc. cit.; Kelly and Coaker, loc. cit.; Lehmann and O’Shaughnessy, loc. cit.; Rao and Kiser, loc. cit. FIGURE III-6 SOURCE SELECTION CRITERIA POOL OF THE BUYER/SELLER RELATIONSHIP DECISION MODEL EQQNQMIQ Lowest Price ‘ Sound Financial Condition Manufacturing Cost Information Payment Terms Price Guarantees ALITY Required Quality Statistical Process Control Quality Control Information Product Warranties In-Coming Inspection Repair Services DELIVERY Best Delivery Lead-Time Rush Deliveries Location of Supplier Frequent Deliveries Product Unavailability On-Time Deliveries Special Handling W Research and Development . Processes . Products Bar-Coding EDI PRQDQQTIQN CAPACITY Capacity Expansion Update Production Status Orr-Going Production Status Family of Products Available Capacity Finish-Goods Status MANAGEMENT Capable Management Productivity Improvements Strike/Work-Stoppage Record Cooperative Philosophy Adapts to Specific Needs Field Service Anticipates Requirements Cooperation Helpful Sales Force Overcomes Buyer Errors Helps in Emergencies 43 BUYER/SELLER RELATIONSHIP DECISION MODEL SUMMARY In summary, it was conjectured that, in the Buyer/Seller Relationship Decision Model, purchase requirement orientation, purchasing objectives of the buying firm, characteristics of the possible suppliers, and characteristics of the supply market, would influence the choice of a buyer/seller relationship. After a buyer/seller relationship is chosen by a purchasing decision-maker, it was also conjectured that, the source selection criteria appropriate for the chosen buyer/seller relationship would be used to evaluate a potential supplier for that buyer/seller relationship. CHAPTER IV RESEARCH DESIGN AND METHODS This chapter presents the research design and methods used to assess the Buy- er/Seller Relationship Decision Model (Figure III-1) developed in Chapter III, and to answer the following two research questions: 1. What factors influence the choice to use either a loosely coupled buyer/seller relationship or a tightly coupled buyer/seller relationship? 2. What source selection criteria are important when evaluating a potential supplier for either a loosely coupled buyer/seller relationship or a tightly coupled buyer/seller relationship? Specifically, this chapter describes the manner in which the conjectures laid out in Chapter III were assessed for internal and external validity, and the reasons for using a mail questionnaire survey design in the empirical research. This chapter also presents the statistical considerations for the sampling plan used in the empirical research, and goes on to explain the development of the measures used. Finally, this chapter presents the statistical hypotheses tested during the empirical research and the reasons for selecting the statistical techniques used to analyze the data. VALIDATION OF BUYER/SELLER RELATIONSHIP DECISION MODEL As previously discussed in Chapter III, the conjectures associated with the Buy- er/Seller Decision Model are based on a review of existing research and practitioner literature, together with interviews of purchasing executives, and recommendations from 44 45 the doctoral dissertation committee. The validation of these-conjectures was accomp- lished in two stages. Initially, the descriptive models of buyer/seller relationships developed in Chapter I, and the Buyer/Seller Relationship Decisions Model conjectures stated in Chapter III, were tested for their internal validity. Statistical hypotheses were developed to test the external validity of the conjectures associated with the Buy- er/Seller Decision Model. Internal Validation. Establishing content and construct validity rests heavily on expert judgment and subjective impressions.l Therefore, to demonstrate internal validity of the descriptive models of buyer/seller relationships and the conjectures associated with the Buyer/Seller Relationship Model, a group of purchasing executives were asked to assess the extent to which they applied to, and represented, their respective domains. The group of judges was selected from participants of The Purchasing and Ma- terials Management Seminar held June 1986 at Michigan State University, and from past and present chairmen of the professional development committees belonging to local Purchasing Management Associations. This group of judges was selected since (1) they have been exposed to recent trends in the field of purchasing and materials manage- ment, (2) they have practical purchasing and materials management experience, (3) they have a commitment to purchasing and materials management education, and (4) they were known to the researcher. Specifically, six judges were identified who (1) had at least ten years of purchasing and materials management experience, (2) represented various manufacturing industries, (3) had managerial responsibility, and (4) were willing to assess the internal validity of the conjectures associated with the Buyer/Seller Relationship Decision Model, the questionnaire, and the descriptive models of buy- er/seller relationships. ‘ 1American Psychological Association, American Educational Research Association and National Council on Measurement Education, Standards for Educational and Psyehel- Ogical Test, (Washington, DC: American Psychological Association, Inc.), 1974; E.F. ~ Stone, Researeh Metheds in Organizational Behavior, (Santa Monica, California: Goodyear Publishing Company), 1978, pp. 51-60. 46 Copies of the loosely coupled and tightly coupled buyer/seller relationship descrip- tive models, the conjectures associated with the Buyer/Seller Relationship Decision Model, and a working copy of the questionnaire, were mailed to each judge (See Appendix A for examples of these items). The reviews of the judges resulted in major modification and enhancement of the Buyer/Seller Relationship Decision Model, the definitions, and the questionnaire. External Validation. The next three sections of this Chapter describe the Research Design and the Methods used to assess external validity by means of a mail question- naire survey. The final section of this Chapter presents the statistical hypotheses and used to analyze the empirical data gathered for this dissertation. MAIL QUESTIONNAIRE SURVEY DESIGN A questionnaire was chosen as the data gathering instrument since this method has been used in similar research eff orts2 and it allowed data to be collected from a diverse set of purchasing professionals in widely scattered locations. However, there are several inherent limitations to this type of design which had to considered and addressed. One inherent limitation of a questionnaire survey design is that the respondents may misunderstand certain parts of the questionnaire, incorrectly answer certain questions, or not answer certain questions. This limitation was addressed during the 2G.W. Dickson, "An Analysis of Vendor Selection Systems and Decisions," Journal 9f Purghasing, February 1966, pp. 5-17; W.A. Dempsey, "Vendor Selection and the Buying Process,” Industrial Marketing Management, 1978, pp. 257-267; W.D. Perreault and F.A. Russ, "Physical Distribution Service in Industrial Purchase Decisions," Journal 9f Marketing, April 1976, pp. 3-10; C.P. Rao and GE. Kiser, "Educational Buyer’s Per- ceptions of Vendor Attributes," lgurnal of Purchasing and Materials Management, Winter 1980, pp. 25-30; D.R. Lehmann and J. O‘Shaughnessy, "Decision Criteria Used in Buying gif f erent Categories,” Journal 9f Purchasing and Materials Management, Spring 1982, pp. ~14. 47 development of the measures for the questionnaire.3 The questionnaire’s length was minimized by including only relevant questions, and these were evolved into clear and concise queries (see Appendix B for an example of the questionnaire). Completion of the questionnaire was encouraged by not requiring that the respondents sign the questionnaire and by offering to them a summary of the final results. Also, the a priori scope of a questionnaire limited the study to those measures which were identified during its development. To mitigate this limitation, the measures were assessed for their relevance and validity with the aid of a number of purchasing professionals. A discussion of this procedure can be found in this Chapter in the section entitled "Measures." Another limitation of a questionnaire survey design is that a relatively large percentage of the questionnaires may not be returned. In addition, the sample may not be truly representative of the population. These two limitations are addressed in the following section. RESEARCH SAMPLE Important statistical requirements had to be considered, in addition to merely practical considerations, when the specific sampling plan was determined for the empiri- cal research of this dissertation. The first statistical requirement was to obtain an unbiased sample truly repre- sentative of the population of purchasers employed in US. manufacturing firms. A sampling plan is acceptably free from bias if it is a random sample.4 A stratified random selection of individuals responsible for purchasing in US. manufacturing firms was used to attempt to obtain an unbiased sample. The sample was proportionally 3The section entitled ”Measures" of this Chapter addresses this limitation of a questionnaire research design, p. 51. 4R. Rosenthal and R.L. Rosnow, Essentials 9f Behavioral Research: Methods and Data Analysis, (New York: McGraw-Hill Book Company), 1984, p. 156. 48 stratified by all twelve manufacturing categories available from the mailing list of Purchasing magazine. The sample was randomly drawn in the following proportions of purchasers employed by twelve industries (SIC codes): Food and Kindred Products 5.8 percent Furniture and Fixtures 2.4 percent Paper and Allied Products 3.1 percent Chemical and Allied Products 8.4 percent Rubber and Plastic Products 2.7 percent Primary Metal Industries 4.6 percent Fabricated Metal Products 12.5 percent Machinery (Except Electrical) 22.2 percent Electrical Equipment and Supplies 18.7 percent Transportation Equipment 9.7 percent Instruments and Related Products 7.4 percent Miscellaneous Manufacturing Industries 2.5 percent 100.0 percent Even though this is not a complete’representation of professional purchasers, the mailing list identified 81,003 individuals authorized to purchase various products and/or services for US. manufacturing firms. In addition to freedom from bias, another statistical requirement was sample stability. Stability means that all samples produced by the sampling plan will yield essentially the same results.5 Instability will occur if the sample size is too small, even if the samples have been chosen without bias. A sample is also too small if the results are not precise enough for the research aims. A minimum confidence level of 95 percent was desired for the empirical research. A 95 percent confidence level implies that if the same sampling plan were used many times in the total population of purchasers employed in US. manufacturing firms, 3 statement made from anyone sample would be correct 95 percent of the time. There was no reason to assume that the responses would not approximate a normal distri- 5A. Kaplan, The Conduct of Inquiry: Methodglogy for Behavioral Sciences, (Scran- ton, Pennsylvania: Chandler Press), 1964. 49 bution; therefore, the abscissa of a normal curve of 1.96 (t) for a 95 percent confidence level was used to determine the required sample size. There was also no reason to assume that population of purchasers employed in US. manufacturing firms would greatly vary in their responses, and so a 5 percent limit of error (d) was considered acceptable. In other words, if 43 percent of the respondents to the survey indicate that certain factors are important to loosely coupled relation- ships, the percentage for the entire population of purchasers employed in US. manufac- turing should lie between 38 to 48 percent. Finally, an advance estimate of population variance (62) was made before the sample size was calculated. Population variance (62) is the product of the observations (p and q) to be made across some range.6 The conservative approach used in this dissertation assumed that the distribution of the population of purchasers employed in US. manufacturing firms would be binomial, thereby deriving the largest possible sample to achieve the 5 percent limit of error ((1). In other words, it was assumed that half of the responses should be from proportion p and the other half from proportion q. Thus, the population variance (62) was assumed to be the conservative value of 0.25. Cochran provides the following formula for determining sample size (n') from an infinite population:7 11’ = tzpq/dz. Therefore, the empirical research required a sample size of, n’ = (1.96)2 (0.5)(0.5)/(0.05)2 n’ = 0.9604/ .0025 n’ = 348.16 as 349. Even though the population from which the sample was drawn is finite (81,003 purchasers), a "finite population correction" (fpc) was not necessary since the sampling 6W.G. Cochran, Sampling Techniques (New York: John Wiley & Sons), 1967, p. 79. 7Cochran, loc. cit., pp. 75-86. 50 faction, n’/N, in the fpc calculation n’/l+(n’/N) remains low. In other words, if the denominator is close to unity, the finite population, as such, has no impact on the standard error of the sample means.8 As the questionnaire was long and detailed and required nearly one hour to complete, questionnaires, along with cover letters and postage-paid envelopes, were mailed on March 6, 1987 to 10,000 randomly selected purchasers to insure an adequate sample for the empirical research. Each cover letter outlined the research questions, and requested their assistance. By using this strategy, by April 30, 1987, 680 completed questionnaires were obtained from purchasers employed in twelve US. manufacturing firms. In appreciation of their assistance with the survey, a summary of the results will be mailed to the 420 respondents who requested copies. The actual responses to the questionnaire are listed by industries (SIC) as follows: Food and Kindred Products 31 Furniture and Fixtures 20 Paper and Allied Products 14 Chemical and Allied Products 60 Rubber and Plastic Products 35 Primary Metal Industries 20 Fabricated Metal Products 134 Machinery (Except Electrical) 42 Electrical Equipment and Supplies 147 Transportation Equipment 63 Instruments and Related Products 63 Miscellaneous Manufacturing Industries _fl 68 An assessment of the actual response rate to the questionnaire can be found in Chapter V (pp. 61-63). The formula used earlier, to determine the required sample size with a 5 percent limit of error (d), was then used to determine the percent limit of error ((1’) with the 8Cochran, loc. cit., p. 23. 51 known sample size of 680. Thus, the percent confidence level associated with the actual response rate is, d’ = x/[tzpq/n’l d’ = \/[1.96z(0.5)(0.5)/680] d’ = \/[0.0096/680] d’ = 3.76. Therefore, a confidence level of 96.24 percent was obtained from the sample of 680 responses for the empirical research. This confidence level is higher than the 95 percent confidence level requirement established during the planning of the empirical research. MEASURES An established method to validate measures is to incorporate the recommendations of a small number of experts. A group of six judges representing the furniture and fixture industry (SIC 25), the fabricating metal products industry ($10 34), the machin- ery industry (SIC 35), and transportation equipment (510 37), assisted in validating the measures before the final printing of the questionnaire. The group of judges were brought together on December 13, 1986 at Michigan State University. Each measure was assessed to determine its appropriateness and format. Relevant recommendations regarding the measures and question format were incorporated before printing the final questionnaire. Influencing Factors. As stated earlier, the objective of the first research question was to determine the influence that certain factors have on the choice to use either a loosely coupled or a tightly coupled buyer/seller relationship. The independent variables for this research question were the categorical classifications of (1) loosely coupled buyer/seller relationship and (2) tightly coupled buyer/seller relationship. The following 52 statements were provided to respondents in lieu of the descriptive models developed in Chapter I: Loosely Ceupleg BuyerZSeller Relationship: The situation where required goods and services are purchased in a competitive environment in which one supplier is often played-off against another for the buying firm’s short-term benefits; disputes are resolved through unyielding negotiations; only limited information is exchanged with the supplier; and adjustments to operating and marketplace conditions are made separately by the buying and selling firms. Tightly Ceupled BuyerZSeller Relationship: The situation where required goods and services are purchased from one or a few preferred suppliers; disputes are resolved through joint problem solving efforts; information which may affect the buying and/or selling firms’ operations is exchanged to improve mutual productivity and to obtain lower overall costs; and adjustments to operating and marketplace conditions are made jointly by the buying and selling firms. The respondents were told to use these categorical classifications as a point of refer- ence from which to answer the questions relating to the dependent variables, the influencing factors. Using a five point rating scale (1 for not at all influential, 2 for slightly influential, 3 for moderately influential, 4 for very influential, and 5 for extremely influential), the respondents were asked to indicate the influence each of the following factors had on their choice to use a loosely coupled buyer/seller relationship, and on their choice to use a tightly coupled buyer/seller relationship: Purehase Reguirement Qrientatien: The purchase requirement is an industry standard. The purchase requirement is a custom-made product. The purchase requirement uses a simple production process. The purchase requirement uses a complex production process. The purchase requirement is used for a non—critical application. 53‘3".“pr The purchase requirement is used for a critical application. 10. 53 The purchase requirement is needed for a short duration of time. The purchase requirement is needed for a long duration of time. The purchase requirement is estimated to be a low dollar expenditure. The purchase requirement is estimated to be a high dollar expenditure. Purchasing Objectives ef the Buying Firm: ll. 12. l3. 14. 15. 16. Reducing costs associated with the purchased products or items. Improving quality of purchased products or items. Obtaining process technology and innovations from suppliers. Obtaining product technology and innovations from suppliers. Reducing inventory levels of purchased products or items. Contributing to the reduction of the time interval from product design to availability of finished-goods to the final customer. ggharecteristies of the Possible Suppliers: 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. There is no delivery performance history for possible suppliers. There is unsatisfactory delivery performance history for possible suppliers. There is satisfactory delivery performance history for possible suppliers. There is no price history for possible suppliers. There is unsatisfactory price history for possible suppliers. There is satisfactory price history for possible suppliers. There is no quality performance history for possible suppliers. There is unsatisfactory quality performance history for possible suppliers. There is satisfactory quality performance history for possible suppliers. Financial information about possible suppliers is unavailable. Financial information about possible suppliers states their financial strength is poor. ‘ Financial information about possible suppliers states their financial strength is strong. The process technology used by possible suppliers is unknown to the buying activity. The process technology used by possible suppliers is simple. The process technology used by possible suppliers is complex. 54 Characteristics pf the Sppply Market: 32. There are only one or a few possible suppliers in the supply market. 33. There are numerous supplier in the supply market. 34. The supply market experiences numerous technological advance- ments. 35. The supply market experiences few technological advancements. 36. Demand is decreasing for the products or items available from the supply market. 37. Demand is increasing for the products or items available from the supply market. 38. There is a decrease in availability of products or items in the supply market. 39. There is an increase in availability of products or items in the supply market. Source Selection Criteria. The second aspect of the empirical research was to answer the research question pertaining to the importance assigned to source selection criteria when evaluating a potential supplier for a loosely coupled and a tightly coupled buyer/seller relationship. The independent variables, for this set of hypotheses, were again the categorical classifications of (1) a loosely coupled buyer/seller relationship and (2) a tightly coupled buyer/seller relationship. The respondents were told to use the categorical classifications as a point of reference from which to answer the questions relating to the dependent variables, the source selection criteria. The dependent variables for this aspect of the empirical research consisted of thirty-nine source selection criteria. The respondents were asked to rank their importance on a five point rating scale (1 for unimportant, 2 for slightly important, 3 for moderately important, 4 for very important, 5 for extremely important). The scale was applied to the following source selection criteria when evaluating a potential supplier for a loosely coupled buyer/seller relationship and for a tightly coupled one: 55 Source Seleetien Criteria: wwwwwwNNNNNNNNNN—————---—u—-.—-— .V‘PPP????°>’P‘S‘:“PPE‘.°§°9°>’9‘MFPNE".° P?°>’.O‘S":“‘P’!"t" Quotes the lowest price. Has a sound financial condition. Provides manufacturing cost information. Provides favorable payment terms. Provides price guarantees for a relevant time period. Offers the required quality. Uses statistical process control. . Has had few in—coming inspection rejections. Provides repair services. Provides a product warranty. Provides field technical services. Provides quality control performance information. Offers the best possible lead-time. Maintains on-time delivery schedules. Provides "rush" deliveries. Provides frequent deliveries. Provides special handling. Maintains plant or warehouse near the buying firm. Has available production capacity. Has the ability to expand production capacity. Updates production capacity availability. Cooperates when unforeseen difficulties occur. Helps in emergency situations. Helps in overcoming buying company’s errors. Advises of product or item unavailability. Adapts to specific needs of the buying firm. Offers a family of products. Anticipates future purchase requirements. Performs research and development on its processes. Performs research and development on its products. Provides ”on-going" production status information. Provides a labor relation record free of strikes or work-stoppages. Provides information on finished-goods inventory levels. Provides Electronic Data Interchange (EDI) capabilities. Provides bar-coding capabilities. 56 36. Has productivity improvement potential. 37. Has a capable management team. 38. Has a cooperative business philosophy. 39. Has a helpful sales forces. Other Measures. The empirical research had an auxiliary objective of determining the use of loosely coupled and tightly coupled buyer/seller relationships by US. manufacturing firms. Therefore, the respondents were asked to estimate for their firms, (1) the percentage of current contracts which could be categorized as loosely coupled and tightly coupled buyer/seller relationships; (2) the percentage of current suppliers participating in loosely coupled and tightly coupled buyer/seller relationships; and (3) the percentage of current dollar expenditures on loosely coupled and tightly coupled buyer/seller relationships. STATISTICAL HYPOTHESES AND DATA ANALYSES Statistical hypotheses and methods used to analyzed the empirical data are presented in this section. The data were analyzed using descriptive statistics, matched t-tests, and other related statistical tests. Computation of the data was accomplished using the Statistical Package for the Social Sciences (SPSS®) available on Arizona State University’s IBM‘8 Mainframe, SPSS/PC+®, and Lotus 123® Spreadsheet. Descriptive Statistics. Collective properties of the data gathered during the empirical research were analyzed by examining frequency distributions, by inspecting Geary Numbers indices to assess the normality of the data, and by observing the estimates of interval confidence for the collected data. Three t-tests were also conducted to determine whether significant differences exist between: (1) the percent- ages of loosely coupled and tightly coupled buyer/seller relationships used by US. manufacturing firms; (2) the percentages of loosely coupled and tightly coupled suppliers used by US. manufacturing firms; and (3) the percentages of loosely coupled and tightly coupled dollar expenditures made by US. manufacturing firms. The purpose of these 57 tests was to determine if statistical differences exist between the categorical variables of loosely coupled and tightly coupled buyer/seller relationships. Results of these assessments and tests may be found in Chapter V (pp. 73—74). Analysis of Influencing Factor Differences. This aspect of the empirical research determined whether the influence of the thirty-nine factors differed significantly when a loosely coupled buyer/seller relationship or a tightly coupled one are chosen. The first null hypothesis used to determine if there was the statistical differences between the influencing factors and the chosen buyer/seller relationship was, Null Hypothesis 1: There are no significant differences between the influence of a factor on the choice to use a loosely coupled or a tightly coupled buyer/seller relationship. Rejection of this null hypothesis would permit acceptance of the alternative hypothesis, that the influence of a factor differs significantly when choosing either a loosely coupled or a tightly coupled buyer/seller relationships. Rejection of Null Hypothesis 1 is important to this analysis since it will demonstrate whether each factor has its own degree of influence when choosing a loosely coupled or tightly coupled buyer/seller relationship, and thus allow modelling of the choice to use either buyer/seller relation- ship. The testing of Null Hypothesis 1 was operationally conducted by thirty-nine matched t-tests which substituted the phase in null hypothesis statement, a factor, with the influencing factor under consideration. In other words, thirty-nine matched t-tests permitted the identification of those influencing factors (t) which differ significantly when choosing a loosely coupled (LC) and a tightly coupled buyer/seller relationships (TC). Specifically, l‘rLc iA l‘r'rc- 58 A two-tailed probability test was used since directional differences were not assumed. The thirty-nine matched t-tests were tested at the 0.01 level of significance. The relative differences (deltas) of the influencing factors proven to differ significantly were then reported, e.g., I‘rLc < fine; ”no > “no- Deltas which are positive numbers are more influential when choosing a tightly coupled buyer/seller relationship, while those with negative numbers are more influential when choosing a loosely coupled buyer/seller relationship. The influencing factors which differed significantly were categorized and examined to ascertain those factors which were more influential when choosing a loosely coupled buyer/seller relationship and those which were more influential when choosing a tightly coupled one. Analysis of Source Selection Criteria Differences. This aspect of the empirical research determined which source selection criteria are more important when evaluating a potential supplier for a loosely coupled and a tightly coupled buyer/seller relationship. The null hypothesis used to determine if there was the significant differences between the importance of the source selection criteria was, Null Hypethesis 2: There are no significant difference between the importance of a source selection criterion when evaluating a potential supplier for a loosely coupled or a tightly coupled buyer/seller relation- ship. Rejection of this null hypothesis would permit acceptance of the alternative hypothesis, that the importance of a source selection criterion differs significantly when evaluating a potential supplier for a loosely coupled or a tightly coupled buyer/seller relationship. Rejection of Null Hypethesis 2 is also important to this research since it will demon- strate whether each source selection criterion has its own degree of importance when evaluating a potential supplier for a loosely coupled or tightly coupled buyer/seller 59 relationship, and thus allow further modelling of the evaluation process for different buyer/seller relationships. The testing of Null Hypothesis 2 was operationally conducted by thirty-nine matched t—tests which substituted the phase in null hypothesis statement, a source selection criterion, with the criterion under consideration. In other words, thirty-nine matched t-tests permitted the identification of those source selection criteria (c) which differ significantly when evaluating a potential supplier for a loosely coupled (LC) and a tightly coupled (TC) buyer/seller relationships. Specifically, #ch t9 I‘c'rc- A two-tailed probability test was also used since directional differences were not assumed. The thirty—nine matched t-tests were tested at the 0.01 level of significance. The relative differences (deltas) of the source selection criteria proven to differ significantly were also reported, e.g., 1‘ch < l‘c'rC; 1‘ch > l‘c'rc- Source Selection Criteria with positive numbers (deltas) are more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship and those with negative numbers (deltas) are more importance when choosing a loosely coupled buyer/seller relationship. The source selection criteria which differed significantly were categorized and examined to ascertain those criteria which are more important when evaluating a potential supplier for each buyer/seller relationship. SUMMARY OF RESEARCH DESIGN AND METHODS This chapter described the research design and methods used to assess the Buy- er/Seller Relationship Decision Model presented in Chapter III. Specifically, this chapter set forth the research design and methods used to assess the developed model for internal and external validity. Internal validity assessment corroborated the conjectures associated with the Buyer/Seller Relationship Decision Model for a small segment of US. w... 60 manufacturing firms. External validity was assessed through the use of statistical hypotheses presented to a larger segment of US. manufacturing firms. Descriptive statistics associated with the data used in the empirical research of this dissertation and the results of null hypothesis testing are presented in Chapter V. Insights into the influence of purchase requirement orientation factors, purchasing objectives of the buying firm, the characteristics of the possible suppliers, and the characteristics of the supply market on the choice to use either a loosely coupled or a tightly coupled buyer/seller relationship, and insights into the importance placed on source selection criteria when evaluating a potential supplier for either buyer/seller relationships are presented in Chapter VI. CHAPTER V RESEARCH FINDINGS This chapter presents descriptive statistics and hypothesis testing results. The descriptive statistics were calculated from the six data sets obtained during the em- pirical research of this dissertation: (1) one set of industry representation of the responding sample, (2) two sets of 39 means for the factors influencing the choice for a buyer/seller relationship, (3) two sets of 39 means for source selection criteria import- ance when evaluating potential suppliers for different buyer/seller relationships, and (4) one set of six means of the percentages of loosely coupled and tightly coupled buy- er/seller relationships in US. manufacturing firms. The descriptive statistics discussed in this chapter measure collective properties of each data set, and, in so doing, describe the essential features of each data set. Also, included in this chapter are results of t-tests which determine the differences between loosely coupled and tightly coupled buyer/seller relationships currently used by US. manufacturing firms. Finally, this chapter presents hypothesis testing results which either accept or reject the null hypo- theses stated in Chapter IV of this dissertation. DESCRIPTIVE STATISTICS Responses. Six-hundred-and-eighty completed questionnaires were obtained from purchasers employed in twelve US. manufacturing categories and provided the data used in subsequent analyses. The frequencies and percentages of the purchasers who provided data are listed below by their manufacturing industries: 61 Food and Kindred Products Furniture and Fixtures Paper and Allied Products Chemical and Allied Products Rubber and Plastic Products Primary Metal Industries Fabricated Metal Products Machinery (Except Electrical) Electrical Equipment and Supplies Transportation Equipment Instruments and Related Products Miscellaneous Manufacturing Industries Totals: 62 Actual Frequencies 31 20 14 60 35 20 134 42 147 63 63 _5_L an) Actual Percentages 4.56 2.94 2.06 8.82 5.15 2.94 19.71 6.18 21.62 9.26 9.26 _l.5_Q 100 If the responses matched the proportions provided by Purchasing’s mailing list, the following frequencies and percentages would have been obtained: Derived Frequencies from Purchasing Possible W W Food and Kindred Product 39.44 5.80 Furniture and Fixtures 16.32 2.40 Paper and Allied Products 21.08 3.10 Chemical and Allied Products 57.12 8.40 Rubber and Plastic Products 18.36 2.70 Primary Metal Industries 31.28 4.60 Fabricated Metal Products 85.00 12.50 Machinery (Except Electrical) 151.96 22.20 Electrical Equipment and Supplies 127.16 18.70 Transportation Equipment 66.96 9.70 Instruments and Related Products 50.32 - 7.40 Miscellaneous Manufacturing Industries 17,99 2,59 Totals: 68999 190.99 Since the data of the actual and derived response rates, or industry representation, consist of frequencies in discrete categories, a chi-square (x2) test was used to deter- mine significant differences between the actual and ideal response rates.1 The computed x2 = 102.97 (d.f. = 11) was significant beyond 0.001;2 therefore, the sample is sig- nificantly different from the proportions of purchasers derived from the Purchasing’s lS. Siegel, Nonparametric Statistics for the Behavioral Sciences, (New York: McGraw-Hill Book Company), 1956, p. 104. 2Siegel, loc. cit., p. 249. 63 mailing list. However, there is no evidence whether the Purchesing mailing list is representative of all purchasing decision-makers employed by US. manufacturing firms. Nevertheless, conclusions can be drawn regarding those purchasing decision-makers responding to the questionnaire. All the data collected from the questionnaires were used in the empirical research; therefore, the sample size varied depending on the analysis performed since some of the questionnaires were incomplete. In reporting the data in this chapter, the actual sample size is identified by "N." Normality of the Data Sets. This section assesses the deviations from normality of the five data sets used in this dissertation. There are a plethora of tests for judging departures from normality but no single test is optimal for all possible deviations. The commonly used chi-square test was not chosen for this dissertation since, according to Wegman, it is a rather insensitive normality test.3 Instead, the Geary test was selected since it is sensitive to a wide range of non-normal p0pulations, and it is considered to be an omnibus test.4 This test statistic, 1‘, depends upon the ratio of the mean deviation to the standard deviation,5 2(I xr -X “/11 J1 ZDm < LO ”HO—OED NIP OZ—UZNDALZ— mMOHU mMDO—m awcmcoflumfimm am~_mm\am>=m umfiqzou >~L5awh o awcmcoflumfim: amcmcomeHmm amfimmm\am>=m uafiaaou >~mmoom sexes: >Haa=m . may do s_am_easumamzu mammfiaazw mfiaflmmoa may be mowumwamuumamzu mm>rsum_ao ocflmmzuasa ccmmmucmwao Langma_=cm¢ ammcsaza \ \ \ \ 99 discussion is presented in three sections: (1) purchase requirement orientation, (2) characteristics of the supply market, (3) characteristics of the possible suppliers, (4) purchasing objectives of the buying firm. Purchase Requirement Orientation. The importance of these influencing factors implies that a custom-made product, a critical application, an estimated high dollar expenditure, a complex production, and a long duration of need, all greatly influence the choice of a tightly coupled buyer/seller relationship. The choice to use such a buy- er/seller relationship for these product requirement orientations is consistent with the conjectures of the influencing factors associated with the Buyer/Seller Relationship Decision Model, and is caused by the buying firm’s need to work closely with one or a few suppliers to mitigate possible perturbations to its operating systems. Corres- pondingly, these purchase requirement orientation factors are less influential when choosing a loosely coupled buyer/seller relationship.7 The purchase requirement orientation factor which most greatly influenced the choice of a loosely coupled buyer/seller relationship was ”an industry standard.” Con- versely, this factor had little influence on the choice of a tightly coupled buyer/seller relationship. An industry standard should be available from numerous suppliers, and thus the buying firm would not need to work closely with a supplier since perturbations to its operating systems could be mitigated by switching suppliers. It was also shown that the purchase requirement orientations of a non-critical application, a simple production process, a short duration of need, and a low estimated dollar expenditure were more influential when choosing a loosely coupled buyer/seller relationship than a tightly coupled one. As before, the buying firm would not need to work closely with a supplier to develop a tightly coupled buyer/seller relationship since perturbations to its operating systems, caused by purchase requirements with these orientations, could be 7Chapter III discusses the interviews and literature review which lead to the conjectures associated with the influence of the P r h in Re irem n ri 11 ion on the choice of a Tightly Coupled Buyer/Seller Relationship, p. 29. 100 mitigated by switching suppliers. Consequently, these purchase requirement orientation factors are less influential when choosing a tightly coupled buyer/seller relationship.8 Characteristics of the Supply Market. The influencing factor of "only one or a few suppliers in the supply market” is more influential when choosing a tightly coupled buyer/seller relationship than when choosing a loosely coupled one. These results support the conjectures of the influencing factors associated with the Buyer/Seller Relationship Decision Model, that a tightly coupled buyer/seller relationship will help insure a continuity of supply when there are only one or a few suppliers in the supply market.9 Conversely, if numerous suppliers are available, the buying firm will choose a loosely coupled buyer/seller relationship since it will be able to play one supplier off against the other to achieve short term cost benefits without sacrificing continuity of supply. Also, if demand is increasing for products available in the supply market, a tightly coupled buyer/seller relationship will be chosen. However, a loosely coupled buyer/seller relationship would be chosen if demand is decreasing. Correspondingly, if the availability of products in the supply market is decreasing, a tightly coupled buyer/seller relationship will be chosen. However, a loosely coupled buyer/seller relationship will be chosen if products are becoming more available. Thus, the buying firm would be able to take advantage of supply market conditions, by maintaining a loosely coupled relationship when numerous suppliers are available, or when products are abundant through decreased demand or increased availability; and by maintaining a tightly coupled relationship when only one or a few suppliers are available, or when products are scarce through increased demand or decreased availability.lo 8Chapter III discusses the interviews and literature review which lead to the conjectures associated with the influence of the r h in R irement rientati n on the choice of a Loosely Coupled Buyer/Seller Relationship, p. 31. 9Chapter III discusses the interviews and literature review which lead to the conjectures associated with the influence of the supply base on the choice of a Tightly Coupled Buyer/Seller Relationship, p. 34. 10Chapter III discusses the interviews and literature review which lead to the conjectures associated with the influence of product supply and demand on the choice of a Buyer/Seller Relationship, pp. 34-36. 101 Characteristics of the Possible Suppliers. In general, these influencing factors should be regarded as being influential for choosing a tightly coupled buyer/seller relationship. Nevertheless, the one factor which had a significant interaction effect was that of the possible supplier using ”a simple production technology" which is more influential when choosing a loosely coupled buyer/seller relationship rather than a tightly coupled one. Thus, if a supplier uses a ”simple production technology," a buying firm would choose a loosely coupled buyer/seller relationship which will allow the switching of suppliers without sacrificing continuity of . supply since numerous suppliers should maintain the required technology. However, if a supplier use a "complex production technology," a buying firm would choose a tightly coupled buyer/seller relationship to insure a working relationship with the supplier using technology which may not be available elsewhere.11 Purchasing Objectives of the Buying Firm. In general, the influence of purchasing objectives is greater for choosing a tightly coupled buyer/seller relationship than a loosely coupled one. Specifically, the most influential purchasing objectives for choosing a tightly coupled buyer/seller relationship are: ”obtaining process technology and innovations from suppliers,” "obtaining product technology and innovations from sup- pliers," ”improving quality of the purchased products or items," and "contributing to the reduction of the time interval from product design to availability of the finished goods to the final customer.” The predominate influence of these purchasing objectives when choosing a tightly coupled buyer/seller relationship, indicates that the buying firm will work with suppliers and exchange information with them to achieve these objectives. For example, if the potential supplier provides a specialized product which may impinge on the buying organization’s operations, then a tightly coupled buyer/seller relationship may be chosen to improve quality, obtain process and product innovations, and reduce total design to finish product lead times. 11Chapter III discusses the interviews and literature review which lead to the conjectures associated with the influence of a supplier’s production technology on the choice of a Buyer/Seller Relationship, p. 34. 102 Summary. All of the original conjectures pertaining to the association of product orientation of the purchase requirement with the preliminary Buyer/Seller Relationship Decision Model were supported during the empirical research; therefore, all these influencing factors should be included in the modified Buyer/Seller Relationship Decision Model. Also, the size of the supply pool, and the supply and demand of the purchase requirement would abet the depiction of the choice of a buyer/seller relationship. Additionally, production technology used by the possible supplier would also influence the choice of a buyer/seller relationship, and should also be included in the modified Buyer/Seller Relationship Decision Model. Finally, all of the purchasing objectives of the buying firm were found to influence the choice of a tightly coupled buyer/seller relationship. Accordingly, the category of purchasing objectives should also be included in the modified Buyer/Seller Relationship Decision Model. THE SOURCE SELECTION CRITERIA POOL AND THE BUYER/SELLER RELATIONSHIP DECISION MODEL This section assesses the second decision juncture of the Buyer/Seller Relationship Decision Model which concerns the evaluation of a potential supplier after the choice to use either a loosely coupled or tightly coupled buyer/seller relationship has been made. The assessment presented in this section is based on the rejection (see Chapter V, pp. 85-88) of Null Hypqthesis 2 of this dissertation stated in Chapter IV. Accordingly, the Model assessment presented in this section will specifically answer the second research question of this dissertation: What source selection criteria are important when evaluating a potential supplier for either a loosely coupled buyer/seller relationship or a tightly coupled buyer/seller relationship? To answer this research question, the primary area of interpretation will be related to the results of the matched t-tests (see Table V-ll, p. 89) which show that 38 of the 39 source selection criteria significantly differ in their importance when evaluating a potential supplier for either a loosely coupled or a tightly coupled buyer/seller relation- 103 ship (P _<_ 0.005).12 The relative differences (deltas) of all the source selection criteria are shown in Table VI-2. Deltas with positive numbers are more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship, and those with negative numbers for a loosely coupled one. Examination of Table VI-2 shows that 37 source selection criteria are more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship, whereas only one source selection criterion has more importance when evaluating a potential supplier for a loosely coupled buy- er/seller relationship. The deltas depicting the importance of the source selection criteria are shown in brackets in the following discussion. Examination of Table VI-2 shows that the source selection criterion of "Quotes the Lowest Price" is the only criterion having more importance {-0539} when evaluating a potential supplier for a loosely coupled buyer/seller relationship, and is, relatively less important when evaluating a potential supplier for a tightly coupled one. Previous source selection criteria research, discussed in Chapter III, stated that the criterion of quoting the lowest price was of paramount importance; however, since previous research did not consider the type of buyer/seller relationship, previous research conclusions may be considered suspect.l3 Since the other source selection criteria have positive deltas, it may be concluded that they are all more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship than for a loosely coupled one. However, the object of this research is to distinguish those source selection criteria which can be considered most important when evaluating a potential supplier for a tightly coupled buyer/seller relationship. Therefore, the following percentiles were calculated from the 37 deltas 12Chapter V discusses the concern of normality and the effect it may have on Type I errors; the true critical value may actually be as high as 0.015 instead of 0.005 for the 38 source selection criteria pp. 63-65. 13Chapter III discusses previous source selection criteria research and the impor- tance of price, delivery, and quality when evaluating a potential supplier, pp. 36-37. 104 TABLE V-2 RANKING OF DELTAS" FOR THE 38 SIGNIFICANTLY DIFFERENT SOURCE SELECTION CRITERIA WHEN EVALUATING A POTENTIAL SUPPLIER Deltas 1. Has a Sound Financial Condition 0.697 2. Performs Research and Development on its Products 0.675 3. Has a Capable Management Team 0.674 4. Performs Research and Development on its Processes 0.666 5. Provides Manufacturing Cost Information 0.663 6. Has Productivity Improvement Potential 0.639 7. Provides a Labor Relation Record Free of Strikes or Work-Stoppages 0.638 8. Has a Cooperative Business Philosophy 0.572 9. Has the Ability to Expand Production Capacity 0.532 10. Provides Information on Finished-Goods Inventory Levels 0.520 11 Updates Production Capacity Availability 0.474 12. Anticipates Future Purchase Requirements 0.464 13. Adapts to Specific Needs of the Buying Firm 0.461 14 Uses Statistical Process Control 0.402 15. Provides Technical Field Services 0.398 16. Cooperates When Unforeseen Difficulties Occur 0.397 17 Provides "On-Going" Production Status Information 0.391 18. Provides Quality Control Performance Information 0.371 19. Provides Special Handling 0.364 20. Helps in Emergency Situations 0.362 21 Helps in Overcoming Buying Company Errors 0.351 22. Has a Helpful Sales Force 0.349 23 Provides Electronic Data Interchange (EDI) Capabilities 0.348 24. Has Available Production Capacity 0.335 25. Provides Price Guarantees for a Relevant Time Period 0.306 26 Provides Repair Services 0.300 27 Provides Bar-Coding Capabilities 0.275 28. Maintains On-Time Delivery Schedules 0.269 29. Has Had Few In-Coming Inspection Rejections 0.268 30. Offers the Required Quality 0.268 31. Advises of Product or Item Unavailability 0.246 32. Provides a Product Warranty 0.223 33. Provides Frequent Deliveries 0.213 34. Offers a Family of Products 0.150 35. Maintains Plant or Warehouse Near the Buying Location 0.148 36. Provides "Rush" Deliveries 0.148 37 Provides Favorable Payment Terms 0.096 38. Quotes the Lowest Price -0.539 t . . . . . . Posrtlve numbers (deltas) are more important when evaluatmg a potential supplier for a Tightly Coupled Buyer/Seller Relationship, and negative numbers (deltas) are more important when evaluating a potential supplier for a Loosely Coupled Buyer/Seller Relationship. 105 associated with source selection criteria which are more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship: (Median) 25th 50th 75th. Percentile Pereentile Pereentile +0.269 +0.364 +0.526 Accordingly, this research assumes that the nine source selection criteria with deltas greater than the 75th percentile (+0.526) have predominate importance when evaluating a potential supplier for a tightly coupled buyer/seller relationship. The source selection criteria of ”Has a Sound Financial Condition" [+0.698] and "Provides Manufacturing Cost Information” [+0.663] indicate that some eeqnqmie related souree seleetion criterie are more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship than for a loosely coupled one (Table VI-2). These results are consistent with the conjectures stated in Chapter 111.14 Thus, it follows that, when evaluating a potential supplier for a tightly coupled buyer/seller relationship, a sound financial condition is important since the relationship will continue over an extended period of the time; they will need a supplier who will not be forced to cease operations because of a poor financial condition. Furthermore, as the number of suppliers in the supply pool is reduced in tightly coupled buyer/seller relationships, the ability to determine a fair and reasonable price through competitive bidding may also be reduced. Therefore, the purchaser in a tightly coupled buyer/seller relationship will have to rely on a potential supplier’s manufacturing cost information to evaluate the fairness and reasonableness of its costs and price. The technically related source selection criteria of ”Performs Research Development on Its Products” [40676] and "Performs Research and Development of Its Processes" [+0.666] are also more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship than for a loosely coupled one. These conclusions are 14Chapter III discusses the interviews and literature review which lead to the conjectures associated with the importance of econqmic releted soqrce seleetion criteria in the preliminary Buyer/Seller Relationship Decision Model, p. 41. 106 also consistent with the conjectures of the association of source selection criteria and the preliminary Buyer/Seller Relationship Decision Model stated in Chapter III.15 In a tightly coupled buyer/seller relationship, the buying firm works with its suppliers to improve productivity and to lower overall costs. Therefore, by having access to the supplier’s research and development projects, the buying firm may be able to incorporate some these to improve productivity and lower costs. The conjectures of the association of source selection criteria and the preliminary Buyer/Seller Relationship Decision Model in Chapter III predicted that source selection criteria related to the management of the potential supplier would be more important when evaluating a supplier for a tightly coupled buyer/seller relationship than for a loosely coupled one.16 These conjectures are supported by the deltas of the source selection criteria of "Has a Capable Management Team" [+0.674], "Has Productivity Improvement Potential" [+0.639], "Provides a Labor Relation Record Free of Strikes or Work-Stoppages" [+0.638], and "Has a Cooperative Business Philosophy" [+0.571]. These results are consistent with the descriptive models of buyer/seller relationships as the commitment between the buying and selling firms is high in a tightly coupled buy- er/seller relationship. Buying firms using this type of relationship would require a capable supplier management team since a tightly coupled buyer/seller relationship will usually last for some time. - Also, the purchasers in the sample may prefer a supplier with a favorable strikes and work-stappages record since strikes or work-stoppages could affect the supply of goods and services in a relationship with only one or a few suppliers. Similarly, buying firms using tightly coupled buyer/seller relationships, may desire suppliers with cooperative business philosophies in order to resolve disputes 15Chapter III discusses the interviews and literature review which lead to the conjectures associated with the importance of technieally related source seleetion eriteria in the preliminary Buyer/Seller Relationship Decision Model, pp. 40-41. 16Chapter III discusses the interviews and literature review which lead to the conjectures associated with the importance of management related source selection eriterie in the preliminary Buyer/Seller Relationship Decision Model, pp. 39-40. 107 through joint problem solving efforts, or to adjust jointly to changes in the marketplace (e.g. increased or decreased customer demand). The conjectures of the association of source selection criteria associated with the Buyer/Seller Relationship Decision Model in Chapter III also predicted that capacity related source selection criteria would be more important when evaluating a potential supplier for a tightly coupled buyer/seller relationship than for a loosely coupled one.17 This notion is supported by the source selection criterion, "Has the Ability to Expand Production Capacity" [+0.532]. In a tightly coupled buyer/seller relationship, the buying firm and the selling firm will cooperate when changes occur in their operating environ- ments, and, therefore, the buying firm would be certain that the selected supplier could expand production capacity to deal with changes in the marketplace (e.g., increased customer demands). In summary, this section has discussed the variability among the cell means of the importance of the source selection criteria used to evaluate potential suppliers for loosely and tightly coupled buyer/seller relationships. Specifically, examination of the deltas (Table VI-2) brought forward the concepts of the ”low-price-rule" and the "delayed—benefit-rule.” The "low-price-rule" is of primary concern when evaluating a potential supplier for a loosely coupled buyer/seller relationship. Thus, when lower prices are available from another supplier, the buying firm would be able to switch to a competing supplier or play the suppliers off against each other to lower the purchase price. On the other hand, ”delayed-benefit-rule" source selection criteria are used when evaluating a potential supplier for a tightly coupled buyer/seller relationship since the buying and selling firms work together to improve productivity and to lower overall costs over a period of time. 17Chapter III discusses the interviews and literature review which lead to the conjectures associated with the importance of prqductiqn eapaeity related source selectiqn criteria in the preliminary Buyer/Seller Relationship Decision Model, p. 39. 108 Assessment of Source Selection Criteria Importance When Evaluating a Potential Supplier The second portion of the modified Buyer/Seller Decision Relationship Model (Figure VI-2) illustrates that purchasing decision-makers will use the appropriate source selection criteria when evaluating a potential supplier for either a loosely coupled or a tightly coupled buyer/seller relationship.18 This section will assess the source selection criteria pool of the Buyer/Seller Decision Relationship Model in light of the conclusions drawn in this section. Loosely Coupled Buyer/Seller Relationships. The source selection criterion of "Quotes the Lowest Price” was significantly more important when evaluating a potential supplier for a loosely coupled buyer/seller relationship than for a tightly coupled one. This source selection criterion suggests a low-price-rule for the pending purchase requirement. Thus, when lower prices are available from another supplier, the buying firm would be able to switch to a competing supplier, or play the suppliers off against each other, to achieve the lowest purchase price. Tightly Coupled Buyer/Seller Relationships. Nine source selection criteria were identified to have predominate importance when evaluating a potential supplier for a tightly coupled buyer/seller relationship (75th percentile and above). These nine source selection criteria can be used to evaluate the future activities of a potential supplier; therefore, delayed-benefit-rule source selection criteria are consequential to the purchasing decision-maker when evaluating a potential supplier for a tightly coupled buyer/seller relationship. Delayed-benefitarule source selection criteria are used when evaluating a potential supplier for a tightly coupled buyer/seller relationship since the buying and selling firms will work together in the long-run to improve productivity and to lower overall costs. The delayed-benefit-rule source selection criteria identified to be important when evaluating a potential supplier for a tightly coupled buyer/seller relationship are: "having a sound financial condition," "performing research and develop- 18Chapter III discusses the development of the Source Selection Criteria Pool component of the Buyer/Seller Relationship Decision Model, pp. 36-42. 109 FIGURE VI-2 SOURCE SELECTION CRITERIA CATEGORIES USED WHEN EVALUATING A POTENTIAL SUPPLIER Loosely Coupled Buyer/Seller Relationship Low-Price- Rule Source Selection Criteria Delayed- Benefit- Hule Sourc- Selection Criteria Tightly Coupled Buyer/Seller Relationship 110 ment on its products," "having a capable management team,” "performing research and development on its processes," "providing manufacturing cost information," ”having productivity improvement potential," "providing a labor relation record free of strikes or work-stoppages," "having a cooperative business philosophy," and "having the ability to expand production capacity." Summary. Based on the findings presented in this section, it was determined that certain source selection criteria are more important when evaluating a potential supplier for loosely coupled buyer/seller relationships, while other are more important for tightly coupled buyer/seller relationships. SUMMARY OF THE BUYER/SELLER RELATIONSHIP DECISION MODEL ASSESSMENT All of the original conjectures pertaining to the influence of purchase requirement qrientatiqn were supported by the empirical assessment of the Buyer/Seller Relationship Decision Model. Accordingly, the ”product type being. purchased," the "process techno- logy used to produce the purchase requirement," the "application of the purchase requirement," the "length of time the purchase requirement is needed," and the ”estim- ated annual dollar expenditure for the purchase requirement,” all influence the choice of buyer/seller relationship and should be included in the Modified Buyer/Seller Relation- ship Decision Model. Also, some of the conjectures related to the eharacteristies qf the supply market also influence the choice of a loosely coupled buyer/seller relationship and should be included in the Modified Buyer/Seller Relationship Decision Model, viz the supply of and the demand for the product being purchased, as well as the ”number of suppliers in the supply market,” assist in the choice of a buyer/seller relationship. Additionally, only one of the charaetetisties qt: the pessiple suppliers, namely the "process technology used by the possible supplier" influenced the choice of a buy- er/seller relationship, and should be included in the Modified Buyer/Seller Relationship Decision Model. All of the purchasing qhiectives qf the paying firm were found to influence the choice of a tightly coupled buyer/seller relationship; accordingly, the 111 category of purchasing objectives is included in the Buyer/Seller Relationship Decision Model. In this Chapter, it was also demonstrated that the Source Selection Criteria Pool of the Modified Buyer/Seller Decision Relationship Model should delineate between source selection criteria for each buyer/seller relationship. Specifically, the Source Selection Criteria Pool should consist of lqw-priee-rule and delayed-benefit-rule source selection criteria. Generally, the lqw-priee-rule source selection criterion is important when evaluating potential suppliers for loosely coupled buyer/seller relationships; conversely, delayed-benefit-rule source selection criteria are important when evaluating potential suppliers for tightly coupled buyer/seller relationships. CHAPTER VII SUMMARY AND IMPLICATIONS This chapter presents a summary of the dissertation and its implications. Besides assisting in understanding buyer/seller relationships, this dissertation also provides purchasing decision-makers with guidelines on how different buyer/seller relationships are chosen, and recommendations on how a potential supplier is evaluated for different buyer/seller relationships. Furthermore, the dissertation provides a paradigm of buyer/seller relationships which can underpin future purchasing research, and thus lead to better decision-making by purchasing managers. SUMMARY OF THE DISSERTATION This dissertation contributes to the study of industrial purchasing by (l) generating models to describe different buyer/seller relationships, (2) quantifying the influence of certain factors when purchasing decision-makers are choosing between buyer/seller relationship approaches, and (3) providing new information on the importance assigned by purchasing decision-makers to different source selection criteria when evaluating a potential supplier for different buyer/seller relationships. Models of Buyer/Seller Relationships. During preliminary interviews with pur- chasing executives it became apparent that consistent definitions of buyer/seller relationships were not available. However, using previous research on ”living systems" and organizational theory as well as the interviews with purchasing executives, the following descriptive models of the relationships between independent and separately owned enterprises buying from, and selling to, each other were developed. 112 113 Loosely Coupled BuyertSeller Relationship: The situation where required goods and services are purchased in a competitive environment in which one supplier is often played-off against another for the buying firm’s short-term benefits; disputes are resolved through unyielding negotiations; only limited information is exchanged with the supplier; and adjustments to operating and marketplace conditions are made separately by the buying and selling firms. Tightly Coupled BuyertSeller Relatiqnship: The situation where required goods and services are purchased from one or a few preferred suppliers; disputes are resolved through joint problem solving efforts; information which may affect the buying and/or selling firms’ operations is exchanged to improve mutual productivity and to obtain lower overall costs; and adjustments to operating and marketplace conditions are made jointly by the buying and selling firms. Using these depictions of buyer/seller relationships, and building upon previous research into buyer/seller relationships and source selection criteria, the following two research questions were asked: 1. What factors influence the choice to use either a loosely coupled buyer/seller relationship or a tightly coupled buyer/seller relationship? 2. What source selection criteria are important when evaluating a potential supplier for either a loosely coupled buyer/seller relationship or a tightly coupled buyer/seller relationship? To answer these research questions, a survey questionnaire was used to gather information on the influence of 39 factors on the choice of a buyer/seller relationship, and the importance of 39 source selection criteria for the evaluation of a potential supplier for the two different buyer/seller relationships. The gathered data was also analyzed to determine significant differences between (1) percentages of loosely coupled and tightly coupled contracts currently used by the firms in the survey, (2) percentages of suppliers awarded loosely coupled and tightly coupled buyer/seller relationships, and 114 (3) the percentage of dollars spent on loosely coupled and tightly coupled buyer/seller relationships. On average: 1. Approximately 54 percent of contracts awarded by the firms in the survey can be classified as tightly coupled buyer/seller relationships, and 46 percent as loosely coupled ones, 2. Approximately 42 percent of suppliers used by the firms in the survey have been awarded tightly coupled buyer/seller relationships, and 58 percent in loosely coupled ones, and 3. Approximately 58 percent of expenditures made by the firms in the survey are for tightly coupled buyer/seller relation- ships, and 42 percent are for loosely coupled ones. In conclusion, the results of three match t-tests showed that manufacturing firms represented in the sample currently have: a greater percentage of their contracts class- ified as tightly coupled buyer/seller relationships than loosely coupled ones (P < 0.001); a smaller percentage of their supply base has been awarded tightly coupled buyer/seller relationships than loosely coupled ones (P < 0.0001); and a greater percentage of their expenditures made to suppliers participating in tightly coupled buyer/seller relationships than loosely coupled ones (P < 0.0001). Data from the completed questionnaires were then used in two full factorial designs to test, statistically, hypotheses concerning the choice of a buyer/seller relationship and the evaluation of a potential supplier for one of two types of buy- er/seller relationship. A synopsis of the results is provided in the following two sections. Choice of a Buyer/Seller Relationship. Based on the data analysis, it was deter- mined that four categories of factors influenced the choice of a buyer/seller relation- ship. The four categories of influencing factors are: (1) purchase requirement orientation, (2) purchasing objectives of the buying firm, (3) characteristics of the possible suppliers, and (4) characteristics of the supply market. 115 Pprehasing Reqpirement Crientatiqp. All the purchase requirement factors used in the research were shown to be influential when choosing a buyer/seller relationship. The purchase requirement factors were (1) product type, (2) the process technology used to produce the product, (3) the application of the product, (4) the length of time the purchased product is needed, and (5) the estimated annual dollar commitment for the purchase requirement. Specifically, product types were considered to be either an ”industry standard" or a "custom-made product." The possible production processes used to produce the purchase requirement were deemed to be either ”simple production technology” or ”complex production technology." The likely application of the purchase requirement was judged to be either ”non-critical" or ”critical.” The expected annual dollar commitment for the purchase requirement was estimated to be either ”a high or a low dollar expenditure.” Finally, the need for the purchase requirement was estimated to be of either "a short or a long period of time." Based on the results of the statistical analysis of the data, it was concluded that a purchase requirement which is ”custom-made," "manufactured by complex process technology,” "used for a critical application,” ”needed for a long period of time,” or "expected to have a high annual dollar expenditure” would influence a purchasing decision-maker to choose a tightly coupled buyer/seller relationship. This conclusion seems reasonable since a buying firm with these purchase requirements would need to work closely and cooperatively with its suppliers to mitigate possible perturbation of its operating system. For example, purchase requirements which are custom-made, or manufactured by complex process technologies, may be available from specialized suppliers, and thus the buying firm may not have the option of switching suppliers. Also, for purchase requirements which are critical to the buying firm, have a high estimated dollar commitment, or are needed for a long period of time, the buying firm may prefer not to switch suppliers or play one supplier off against another. Thus, the buying firm would choose a tightly coupled buyer/seller relationship which would allow 116 the supplier to gain competence in producing the critical requirement, economies-of- scale, and experience in producing the purchase requirements. On the other hand, it was also concluded that a purchase requirement which is an "industry standard,” "manufactured by a simple production process," "used for a non- critical application,” "required for a short length of period,” or "expected to have a low annual dollar commitment relative to the f irm’s annual dollar purchases,” would influence a purchasing decision-maker to choose a loosely coupled buyer/seller relationship. This conclusion seems reasonable as the buying firm’s operation is not apt to be adversely affected by these orientations of the purchase requirement. Therefore, the buying firm would not need to work closely with one or a few suppliers, nor would there have to be any cooperation or commitment by the buying firm, since purchase requirements which are industry standards or non-critical to the buying firm may be available from numer- ous suppliers. In other words, the buying firm could easily switch from one supplier to another thereby obtaining benefits of quoted lower prices, etc. Also, purchase require- ments which are required for a short length of period or expected to have a low annual dollar commitment, relative to the firm’s annual dollar purchases, should not impact the buying firm’s operations and, therefore, the buying firm would not need to develop tightly coupled buyer/seller relationships with suppliers to insure a continuity of supply. Purchasing Objectives of the Buying Firm. In general, the influence of purchasing objectives is greater for choosing a tightly coupled buyer/seller relationship than a loosely coupled one. Specifically, the most influential purchasing objectives for choosing a tightly coupled buyer/seller relationship are: "obtaining process technology and innovations from suppliers," "obtaining product technology and innovations from sup— pliers," "improving quality of the purchased products or items,” and "contributing to the reduction of the time interval from product design to availability of the finished goods to the final customer.” Therefore, it appears that buying firms, with these purchasing objectives, may use tightly coupled buyer/seller relationships, which limit the suppliers 117 to a select group, thus permitting an exchange of information and a cooperative environment to achieve these objectives. Characteristics qf the Supply Market. Three of the supply market characteristics influenced the choice of buyer/seller relationship. Specifically, the analysis of the data obtained for this research confirmed that ”one or a few possible suppliers in the supply market" would lead a buying firm to choose a tightly coupled buyer/seller relationship. The choice of this type of buyer/seller relationship would help insure a continuity of supply from one or a few possible suppliers. However, if "numerous suppliers" are available, the buying firm would be more likely to choose a loosely coupled buyer/seller relationship, since it would be able to play one supplier off against another to achieve benefits (e.g., lower prices) without sacrificing continuity of supply. Also, if the ”demand is increasing for products available in the supply market,” a tightly coupled buyer/seller relationship will be chosen; however, a loosely coupled buyer/seller relation- ship would be chosen if "demand is decreasing." Similarly, if the availability of products in the supply market is decreasing, a tightly coupled buyer/seller relationship will be chosen, but a loosely coupled buyer/seller relationship will be chosen if products are becoming more available. Thus, the buying firm would be able to retain a contin- uity of supply within a loosely coupled relationship when numerous suppliers are available, or when products are abundant because of decreased demand or increased availability. In contrast, the buying firm would need to maintain a tightly coupled relationship when only one or a few suppliers are available, or when products are scarce through increased demand or decreased availability. Charaeteristies qf the Possible Suppliers. Only one characteristic pertaining to possible suppliers influences the choice of a buyer/seller relationship. Specifically, the data provided evidence that if suppliers are using a ”simple process technology" the purchasing decision-maker would choose a loosely coupled buyer/seller relationship. A simple production process should be readily available from numerous suppliers and thus a buying firm would not have to develop long-term commitments to any one supplier. 118 Therefore, the buying firm would be able to play one supplier off against another to obtain immediate benefits associated with the purchase requirement. However, if a supplier uses a "complex production technology,” a purchasing decision-maker would choose a tightly coupled buyer/seller relationship to insure a working relationship with the supplier, as a complex production technology may not be available from other suppliers. In summary, the factors influencing the choice of loosely coupled buyer/seller relationships are listed in Table VII-l, those influencing the choice of tightly coupled buyer/seller relationships are listed in Table VII-2. TABLE VII-1 PREDOMINATE FACTORS WHICH INFLUENCE THE CHOICE OF A LOOSELY COUPLED BUYER/SELLER RELATIONSHIP Average Influence for a Tightly Coupled Average Influence for a Loosely Coupled Buyer] Seller Buyer/ Seller Relationship Relationship Purehase Requirement Crientatiqns Industry Standard 2.704 3.750 Short Duration of Need 2.609 3.212 Simple Production Process 2.547 3.193 Non-Critical Application 2.470 3.173 Low Dollar Expenditure 2.509 3.109 hra rii fhPsibl ulir Simple Process Technology 2.740 3.064 Charaeteristies pf the Supply Market Increasing Availability 3.151 3.412 Numerous Suppliers 2.755 3.393 Decreasing Demand 3.198 3.337 119 TABLE VII-2 PREDOMINATE FACTORS WHICH INFLUENCE THE CHOICE OF A TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP Average Average Influence for a Influence for a Tightly Coupled Loosely Coupled Buyer/ Seller Buyer] Seller Relationship Relationship Purchase Requirement Crientations Critical Application 4.413 3.083 Custom-Made Product 4.351 2.864 High Dollar Expenditure 4.231 3.210 Long Duration of Need 4.074 3.012 Complex Production Process 4.062 2.769 Characteristies qf the Possible Supplier Complex Process Technology 4.062 2.923 Characteristics of the Supply Market Only One or a Few Suppliers 4.324 3.354 Decreasing Availability 4.143 3.346 Increasing Demand 3.912 3.256 Purchasing Cbiectives of the Buying Firm Improving Purchase Product Quality 4.266 3.457 Reducing Total Lead-Time 4.008 3.118 Obtaining Product Technology 3.964 2.888 Obtaining Process Technology 3.893 2.782 Evaluation of a Potential Supplier. A second set of data obtained from the questionnaires was analyzed to answer the second research question. Based on this analysis, it was determined that certain source selection criteria are more important when evaluating a potential supplier for loosely coupled buyer/seller relationships, while others are more important for tightly coupled buyer/seller relationships. qusely Ceppled BuyerZSeller Relatiqnships. The source selection criterion of "Quotes the Lowest Price" was significantly more important when evaluating a potential supplier for a loosely coupled buyer/seller relationship than for a tightly coupled one. Thus, when lower prices are available from another supplier, a purchasing decision- 120 maker would be able to switch to a competing supplier, or play the suppliers off against each other, to achieve the lowest purchase price. Tightly Cqupled BuyerZSeller Relatiqnships. Thirty—seven of the 39 source selection criteria used in the research were found to have means greater when evaluating a potential supplier for a tightly coupled buyer/seller relationship than for a loosely coupled one. The research categorized the 37 source selection criteria into percentiles, and then assumed that source selection criteria in the 75th percentile had predominate importance when evaluating a potential supplier for a tightly coupled buyer/seller relationship. The following nine source selection criteria are assumed to have pre- dominate important when evaluating a potential supplier for a tightly coupled buy— er/seller relationship: ”having a sound financial condition," "performing research and development on its products," "having a capable management team," "performing research and development on its processes,” "providing manufacturing cost information," "having productivity improvement potential," "providing a labor relation record free of strikes or work-stoppages," "having a cooperative business philosophy," and "having the ability to expand production capacity.” Thus, in a tightly coupled buyer/seller relationship, the purchaser needs to be certain that both firms will be able to work cooperatively, with joint-profit maximization emphasis and mutual productivity interest to obtain reciprocal benefits over an extended period of time. The source selection criterion which is the only one important solely when evaluating a potential supplier for loosely coupled buyer/seller relationships is listed in Table VII-3. The source selection criteria which are most important when evaluating a potential supplier for tightly coupled buyer/seller relationships, are listed in Tables VII-4. 121 TABLE VII-3 PREDOMINATE SOURCE SELECTION CRITERION WHICH IS IMPORTANT WHEN EVALUATING A POTENTIAL SUPPLIER FOR LOOSELY COUPLED BUYER/SELLER RELATIONSHIPS Average Importance for a Tightly Coupled Average Importance for a Loosely Coupled Buyer/ Seller Buyer/ Seller Relationship Relationship Quotes the Lowest Price 3.490 4.029 TABLE VII—4 PREDOMINATE SOURCE SELECTION CRITERIA WHICH ARE IMPORTANT WHEN EVALUATING A POTENTIAL SUPPLIER FOR TIGHTLY COUPLED BUYER/SELLER RELATIONSHIPS Average Importance for a Tightly Coupled Average Importance for a Loosely Coupled Buyer / Seller Buyer/ Seller Relationship Relationship Cooperative Business Philosophy 4.226 3.654 Capable Management Team 4.138 3.464 Sound Financial Condition 3.962 3.265 Ability to Expand Production Capacity 3.675 3.143 Product Research and Development 3.621 2.946 Manufacturing Cost Information 3.592 2.929 Process Research and Development 3.565 2.899 Labor Record Free of Work-Stoppages 3.547 2.909 Productivity Improvement Potential 3.524 2.885 IMPLICATIONS OF THE RESEARCH The final Buyer/Seller Relationship Decision Model (Figure VII-l) depicts the interrelationship of the results of this dissertation. The Buyer/Seller Relationship Decision Model consists of two sections, the first of which illustrates that once the purchasing decision-maker identifies the orientation of the purchase requirement, the characteristics of the possible suppliers, and the characteristics of the supply market, a choice is made to use either a loosely or a tightly coupled buyer/seller relationship. 122 Al AHA—02 ZOE—Una EImZOFHAei—mm MmAAMm\~—m>3m A may—DO?— arzecerse_ez eer_am\es>=m seraeeu ars=a_a ma_cm=c_um_m¢ am__mm\am>=m um_q=cu >Hbzaflh as. ewemmaau cambamfiam mua=om a awzmcowmmymm r mawzmcelbm_mc amHHmm\am>=m umfiazou >Hmmc=m as. mflemb_au cofluummam asazcm A a_=mcoflum~m= em_Hmm\em>=m mafiazcu >Lamo=m sexes: >Haa=m was Lo mowsmlamsumemcu memflmaazm QHAHmmca may Lo moaummemmsmamzu ....““‘--i -.“““‘-- ceummucaLeo Easemewacm: mmmzueza ““-—-..__t .......“‘-4 mm>fluum_n: acflmecuaza 123 The second section of the model illustrates that after choosing a buyer/seller relation- ship, the purchasing decision-maker will then evaluate a potential supplier by using the source selection criteria appropriate to the chosen buyer/seller relationship. Addition- ally, the results of this dissertation have implications for both purchasing management and future buyer/seller relationship research. The following two sections describe these implications. Purchasing Management. The research identified some patterns. which may have implications for purchasing managers. Although these patterns cannot be generalized to all purchasing management situations, they can (1) provide a possible procedure for choosing buyer/seller relationships, and (2) identify source selection criteria important when evaluating a potential supplier for different buyer/seller relationships. Generally, the purchasing objectives of a buying firm influence the choice of a tightly coupled buyer/seller relationship; therefore, purchasing decision-makers with the specific purchasing objectives of "Improving Purchased Product Quality," ”Reducing Design to Final Product Availability Lead-Time,” "Obtaining Product Technology or Innovation," and "Obtaining Product Technology or Innovation" will use choose a tightly coupled buyer/seller relationship to achieve these objectives. Furthermore, purchasing decision-makers should systematically identify specific purchase requirements from specialized suppliers (e.g., custom-made, produced by a complex production processes), and those readily available from general suppliers (e.g., industry standards, produced by a simple production processes). The purchasing decision-maker should also identify purchase requirements which may impinge on the buying organization’s operations during the course of a tightly coupled buyer/seller relationship (e.g., used for critical applica— tions, required for a long duration, expected to have a high dollar expenditure), and those which are not likely to affect the Operations (e.g., used for non-critical applica- tions, required for a short duration, expected to have a low dollar expenditure). Thus, if the supplier provides a general product, and the product will not affect the buying organization’s operation, then a loosely coupled buyer/seller relationship may be chosen. 124 However, if the supplier provides a specialized product which may impinge on the buying organization’s operations, then a tightly coupled buyer/seller relationship should be chosen, thus establishing a means for achieving lower costs and improved quality. Also, purchasing decision-makers should consider certain factors relating to the supply market—and then chose a loosely coupled buyer/seller relationship when the supply availability is increasing, the demand for the purchase requirement is decreasing or when there are numerous suppliers in the supply market; but, chose a tightly coupled buyer/seller relationship when the supply availability is decreasing, the demand for the purchase requirement is increasing or when there is only one or a few suppliers in the supply market. Additionally, purchasing decision-makers should balance certain factors relating to the characteristics of the possible suppliers—and then chose a loosely coupled buyer/seller relationship when the possible suppliers use a simple production technology; but chose a tightly coupled buyer/seller relationship when the possible suppliers use a complex production technology. Even though, these influencing factors were shown to be applicable to the sample responding to the questionnaire of this dissertation, purchasing managers can use these factors as standards to determine whether their choice of a buyer/seller relationship is consistent with the findings of this dissertation. The findings of source selection criteria importance suggest that purchasing decision—makers must use a distinctive strategy when evaluating a potential supplier for different buyer/seller relationships. A purchasing decision-maker will primarily evaluate a potential supplier for a loosely coupled buyer/seller relationship on its ability to provide the lowest quoted price. This evaluation process can be easily accomplished by an individual purchasing decision-maker. However, a potential supplier being evaluated for a tightly coupled buyer/seller relationship requires a more critical examination and, accordingly, this evaluation should be augmented by several functional experts in the buying organization. Ideally, the evaluation process should proceed with the assistance of financial experts who would assess the soundness of the potential supplier’s financial condition and appraise its manufacturing cost information; engineering experts should 125 assess the effects of a potential supplier’s research and development on its products and processes; operations management experts should assess the potential supplier on its ability to expand production capacity, and on its productivity improvement capability, as well as assisting in the appraisal of its manufacturing costs information. The purchasing decision-maker should also evaluate the labor record of a potential supplier to determine if work-stoppages or strikes may impact a tightly coupled buyer/seller relationship, assess a potential supplier’s management team to determine if it is capable of directing and controlling its firm during the course of the relationship, and ascertain if the potential supplier’s business phi1050phy is congruent with the buying firm’s purchase needs. The collaboration of financial, engineering and operations management experts with the purchasing decision-maker should lead to a more critical and comprehensive evaluation of a potential supplier, and the selection of the most appropriate supplier for the tightly coupled buyer/seller relationship. Future Research. The Buyer/Seller Relationship Decision Model, based on the results of this dissertation, also provides a paradigm of purchasing decision-making behavior when using different buyer/seller relationships. This paradigm allows future research into buyer/seller relationships to progress with a basic understanding of which factors influence a buyer/seller relationship, and which source selection criteria are important when evaluating a potential supplier for two different buyer/seller relation- ships. Therefore, future research should be able to answer specific questions which should assist purchasing managers using different buyer/seller relationships. Specifically, the findings of this dissertation should facilitate future investigation into: 1. Determining which of the variables used in choosing a buyer/seller relationship, and in evaluating a potential supplier, can be controlled to affect performance of the buying and selling firms; 2. Categorizing the relevant costs and their magnitude, when choosing a buyer/seller relationship and when evaluating a potential supplier; 126 3. Identifying the association between costs and decision variables when choosing a buyer/seller relationship and when evaluating a potential supplier, and recognizing the important tradeoffs among these costs; 4. Conducting longitudinal studies to determine the long-term effects of using different buyer/seller relationships on the buying and selling firms; 5. Investigating the three-way interaction of buy- er/seller relationships, influencing factors and source selection criteria; 6. Discovering patterns of influencing factor and source selection criteria importance in different manufac- turing industries; 7. Examining different multinational companies to determine patterns of influencing factors and source selection criteria importance between nations and cultures; 8. Examining the patterns of influencing factor and source selection criteria importance within the service sector; 9. Examining the selling firm’s choice process when confronted by tightly coupled buyer/seller relation- ship opportunities. Previous research into buyer/seller relationships either has attempted to assist selling firms to develop better marketing strategies, or has described the effect of different buyer/seller relationships on the purchasing activity. Source selection criteria research has emphasized the role of product orientation when evaluating a potential supplier. However, additional research, which combines buyer/seller relationships and source selection criteria, was and is necessary to fully understand purchasing decision- making behavior. This dissertation is one of the first studies which considers the buyer/seller relationships and source selection criteria together; it should not be the last. 127 MICHIGAN STATE UNIVERSITY . GRADUATE SCHOOL OI BUSINESS ADMINISTRATION EAST LANSING - MICHIGAN ' 48824-1121 DEPARTMENT OF MANAGEMENT 1517) 555-5415 August 13, 1986 Thank you for agreeing to help with my dissertation. As I men- tioned to you in our telephone conversation, I am soon to sample -10,000 purchasing professionals by a questionnaire to determine the influence that factors of product orientation, supplier pro- file and competitive congruency have on the choice of a buyer and seller relationship; and the importance of certain source selec- tion criteria once the buyer and seller relationship has been chosen. I appreciate your willingness to comment on my definitions of buyer and seller relationships; to assess the applicability of the my hypotheses concerning factor influence and source selec- tion criterion importance when you choose a relationship and evaluate a potential supplier; and to critique my questionnaire. Please record your comments, assessments and criticisms on the enclosures, and return them to me in the provided envelope. Results to the survey should be available within six months, and I will sent you a copy of my findings. Again, thank you for your interest and willingness to assist me in my doctoral studies. Sincerely yours, Robert Landeros Doctoral Candidate Purchasing and Materials Management Enclosures: Definitions of Buyer and Seller Relationships Comment Sheet for Definitions of Buyer and Seller Relationships Research Hypotheses and Assessment Sheet Questionnaire Critique Sheet for Questionnaire AMI-'15 an All/armature Adm-l fqual Opportunity Institution 128 hichigan State University Page 1 BUYER RND SELLER RELRTIUNSHIPS U.5. oanufacturing fires have traditionally restricted their buyer and seller relationships to two extreae options, open aartet bargaining and backward integration (Hayes and lheelwright, 1984; p. 297). Open aarket bargaining prevents a buying fire froa becoeing too dependent on a single supplier by allowing it to select a supplier free a wide supply pool consisting of several potential suppliers. This enables a buying fire to play one supplier off against another. Open aartet bargaining provides buying fires with oaxieuo control over the buyer-seller relationship as it allows the buying and selling fires to stipulate contingencies associated with purchases on separate contractual agreeaents. These agreeaents are often re-written at each contract interval and are only concerned with short-tern forecasts of the iaaediate future (Hilliaoson, 1975; p. 941. In open eartet bargaining, buying and selling fires are separate and independent enterprises. This type of arrangeeent can be classified under the definition of loosely coupled relationships (Elassaan, 1973; p. 84), since the buying and selling fires are not required to provide inforeation on each other’s activities or cope collectively with changes in their operating environaents. A 'loosely coupled relationship' will be defined, for the proposed research project, as follows: The condition in which required goods and services are purchased in a coapetitive environaent such that one supplier can be played-off against another for short-tern gains; disputes are resolved through legal interpretation of the contract; only liaited inforoation is exchanged with the supplier, and adjustoents to operating and aarketplace conditions are Iade by the buying and selling fires separately. Backward integration, the other extreoe of buyer and seller relationships, can be regarded as a strategic oove used to reduce costs or protect the buying fire against supplier exploitation. Protection is gained though the ownership and aanageaent of all supplier activities (Hayes and lheelwright, 1984; p. 275). Each dependent interaediate production activity can provide inforoation about price and oaterial availability to the other production activities (Arrow, 1975; Carlton, 1977, 1978). The accessibility of such inforaation allows integrated decisions on fire-wide production levels and capital investoents. However, uncertainty about final deaand oay lead to expensive idle capacity of the integrated fire (Arrow, 1975; Carlton, 1977, 1978). Therefore, an integrated fire can be considered a fully coupled relationship since a perturbation of one of the interaediate production activities oay affect another (Slassaan, 1973; p. 84). The proposed research project will not consider fully coupled relationships since independent buying and selling enterprises are not present. Nevertheless, for consistency of definitions, 'a fully coupled relationship' is defined as follows: The condition in which required input goods and services are produced by the buying fire; disputes are resolved by aanageoent trade-offs; inforwation is exchanged to optioize integrated production planning and control; and adjustaents to operating and aarketplace conditions are aade by the user and supplier concurrently. A tightly coupled relationship lies between loosely and fully coupled relationships. 0n the one hand, tightly coupled relationships are siwilar to fully coupled relationships since both encourage the buying and selling fires to behave cooperatively when unforeseen contingencies develop, with a joint-profit aaxioization ewphasis (Hilliaoson, 1975; p. 91). On the other hand, the production activities are separately owned in tightly coupled relationships as is also the case in loosely coupled relationships. 12259 Michigan State University Page 2 Tightly coupled relationships are being used by U.S. aanufacturing fires in an effort to iaprove their productivity as well as their suppliers' productivity (Bohn, 1983; p. 9); and to reduce their response tile to aarket deeands (Drozowski, 1985a; p.45). For exaaple, by coupling tightly with sole of its suppliers, Ford Motor Coapany was able to help thee reduce their rejection rate of purchased relays free 40 percent to less than one percent within eight wonths, thereby raising production frow 3,000 relays per line per shift to as ouch as 6,000 and cutting the supplier’s wanufacturing costs 20 percent (Adkins and Diller, 1983; p. 75). In another exaeple, Xerox Corporation was able to reduce its copier costs by 10 percent every year froa 1980 to 1985 by waintaining tightly coupled relationships with its suppliers (Raia, 1985; p.45). Tightly coupled relationships usually suffer a loss of flexibility because there is an increased dependence on a narrow supply or custower pool. A narrow supply pool will not allow the buying fire to eaxieize its objectives by playing one supplier off against the other. Therefore, to stay viable, both separately and jointly, the buying and selling fires oust provide inforaation on their activities which iepinge on or affect the other's systee, and cope collectively with environaental changes (Pfeffer and Salancik, 1978; p. 145). Nithin these constraints, the proposed research project defines a 'tightly coupled relationship' as follows: The condition in which required input goods and services are purchased free one or a few suppliers; disputes are resolved through joint problea solving efforts; inforoation which way affect the other party’s operation is exchanged to iaprove eutuaI productivity and to obtain lower overall costs; and adjustaents to operating and earketplace conditions are oade by the buying and selling fires jointly. The following table suawarizes the attributes of loosely and tightly coupled relationships which will be used in the proposed research project. For conceptual clarification, the table also sueaarizes the attributes of fully coupled relationships. LOOSELY COUPLED TIGHTLY COUPLED FULLY COUPLED RELATIONSHIPS RELATIONSHIPS RELATIONSHIPS MANY SUPPLIERS IN A ONE OR PEI INTERNALLY SUPPLY POOL COMPETITIVE DEDICATED INTEGRATED ENVIRONMENT SUPPLIERS SUPPLIERS NEAR: PLAYS ONE STRONGER: HORKS HITH STRONGEST: SUPPLY COMMITMENT SUPPLIER AGAINST SUPPLIER FOR SOURCE IS A PART OF THE OTHER MUTUAL BENEFITS THE BUYING FIRM PURCHASE ORDER’S DISPUTE RESOLUTION TERMS AND JOINT PROBLEM MANAGERIAL CONDITIONS SOLVING TRADE-OFFS EXCHANGE OF INFORMATION RESTRICTED RECIPROCAL MUTUAL MARKETPLACE ADJUSTHENTS SEPARATELY JOINTLY CONCURRENTLY 130 Please consent on the acceptability of the LOOSELY COUPLED BUYER AND SELLER RELATIONSHIP definition: Please consent on the acceptability of the FULLY COUPLED BUYER AND SELLER RELATIONSHIP definition: Please coowent on the acceptability of the TIGHTLY COUPLED BUYER AND SELLER RELATIONSHIP definition: (please return this page) 131 Michigan State University Page 1 of 6 Please wake your coaeents on the applicability of the following hypotheses in the wargins. RESEARCH HYPOTHESES The following research hypotheses have been developed to test the type and influence of factors when choosing a buyer and seller relationship, and to test the type and iaportance of source selection criteria when evaluating loosely or tightly coupled suppliers. The first set of hypotheses are designed to test the relative influence that product orientation factors, supplier profile factors, and coapetitive congruency factors have on the eventual type of relationship. The relative iaportance of the source selection criteria used by the purchasing decision-eater when evaluating loosely and tightly coupled suppliers will be deterained using the second set of hypotheses. HYPOTHESES OF FACTORS INFLUENCING THE CHOICE OF LOOSELY AND TIGHTLY COUPLED RELATIONSHIPS The first set of hypotheses will test the type and relative influence of product orientation factors (Dickson, 1966; Cardozo and Cagley, 1971; Kelly and Coaker, 1976; Perreault and Ross, 1976; Deapsey, 1978; Crow, Olshavsky and Suaaers, 1980; Crow and Lindquist, 1982; Lehaann and O’Shaughnessy, 1982; Rao and Kiser, 1982), supplier profile factors (Porter, 1980; Crosby, 1984; Ruderean, 1984), and coopetitive congruency factors (Buffa, 1988; Roger, 1985; Ruderaan, 1984; Stundza, 1985; Teain, 1984) on the choice of a buyer and seller relationship. The hypotheses to be tested are: H1. The factors which orient the product or itea to be purchased will influence differently the choice of either a loosely or tightly coupled relationship: NlA. The degree of product or itew standardization will have a different influence when choosing either a loosely or tightly coupled relationship: HlAa. A standard product or itea will be wore influential when choosing a loosely coupled relationship. HlAb. A non-standard product or itea will be sore influential when choosing a tightly coupled relationship. HlB. The wake-up of the product or itee will have a different influence when choosing either a loosely or tightly coupled relationship: HlBa. A product or iteo with a siaple cowposition and configuration will be sore influential when choosing a loosely coupled relationship. Hle. A product or itea with a cooplex coeposition and configuration will be wore influential when choosing a tightly coupled relationship. HlC. The intended application of the product or itee will have a different influence when choosing either a loosely or tightly coupled relationship: HlCa. A product or iteo with a standard application will be sore influential when choosing a loosely coupled relationship. Hle. A product or itea with a novel application will be sore influential when choosing a tightly coupled relationship. (Please return this page) 132 Hichigan State University H20 H10. HIE. The factors which profile the supplier will influence differently the choice of either a The annual quantities required for the product or ites will have a different influence when choosing either a loosely or tightly coupled relationship: HlDa. A product or ites required in ssall quantities will be sore influential when choosing a loosely coupled relationship. HlDb. A product or ites required in large quantities will be sore influential when choosing a tightly coupled relationship. The annual dollar cossitsent of the product or ites will have a different influence when choosing either a loosely or tightly coupled relationship: HIEa. A product or ites with a low annual dollar cossitsent will be sore influential when choosing a loosely coupled relationship. HlEb. A product or ites with a high annual dollar cossitsent will be sore influential when choosing a tightly coupled relationship. loosely or tightly coupled relationship: H2A- H28. H20. "2D 0 The experience the buying firs has with the supplier will have a different influence when choosing either a loosely or tightly coupled relationship: HZAa. Unsuccessful or no experience with a supplier will be sore influential when choosing a loosely coupled relationship. ' H2Ab. Successful experience will be sore influential when choosing. a tightly coupled relationship. The level of confidence the buying firs has in the supplier's product will have a different influence when choosing either a loosely or tightly coupled relationship: HZBa. Low confidence in the supplier's product will be sore influential when choosing a loosely coupled relationship. HZBb. High confidence in the supplier's product will be sore influential when choosing a tightly coupled relationship. The level of confidence the buying fire has in the supplier's production process will have a different influence when choosing either a loosely or tightly coupled relationship: H2Ca. Low confidence in the supplier’s production process will be sore influential when choosing a loosely coupled relationship. H2Ab. High confidence in the supplier's production process will be sore influential when choosing a tightly coupled relationship. The relationship saintained by the supplier with its sources of supply will have a different influence when choosing either a loosely or tightly coupled relationship: H2Da. A supplier saintaining loosely coupled relationships with its source of supply will be sore influential when choosing a loosely coupled relationship. (Please return this page) Page 2 of 6 133 Hichigan State University HZEO HZDb. A supplier saintaining tightly or fully coupled relationship with its sources of supply will be sore influential when choosing a tightly coupled relationship. The relationship saintained by the supplier with its distribution channel will have a different influence when choosing either a loosely or tightly relationship: H2Ea. A supplier saintaining loosely coupled relationships with its distribution channel will be sore influential when choosing a loosely coupled relationship. H2Eb. A supplier saintaining tightly or fully coupled relationship with its distribution channel will be sore influential when choosing a tightly coupled relationship. coupled H3. Cospetitive congruency factors will influence differently the choice of either a loosely or tightly coupled relationship: H3A I H38. Hhen a buying firs cospetes on the basis of low cost, its choice of either a loosely or tightly coupled relationship will be influenced differently by the supplier’s cospetitive strategy: HSAa. A supplier with a low cost cospetitive strategy will be influential when choosing a tightly coupled relationship. HSAb. A supplier with a high quality product strategy will be influential when choosing a loosely coupled relationship. H3Ac. A supplier with a dependability of supply strategy will be influential when choosing a loosely coupled relationship. HSAd. A supplier with a flexibility/service strategy will be influential when choosing a loosely coupled relationship. IOFE IOFE IOFE IOF! Nhen a buying firs cospetes on the basis of high product quality, its choice either a loosely or tightly coupled relationship will be influenced differently the supplier’s cospetitive strategy: HSBa. A supplier with a low cost cospetitive strategy will be influential when choosing a loosely coupled relationship. HSBb. A supplier with a high quality product strategy will be influential when choosing a tightly coupled relationship. H3Bc. A supplier with a dependability of supply strategy will be influential when choosing a loosely coupled relationship. HSBd. A supplier with a flexibility/service strategy will be influential when choosing a loosely coupled relationship. (Please return this page) IO?! IOFE IO?! IOFQ of by Page 3 of 6 I34 Hichigan State University H30. Nhen a buying firs cospetes on the basis of dependability of supply, either a loosely or tightly coupled relationship will be influenced differently by the supplier’s cospetitive strategy: H3Ca. A supplier with a low cost cospetitive strategy will be influential when choosing a loosely coupled relationship. H3Cb. A supplier with a high quality product strategy will be influential when choosing a loosely coupled relationship. H3Cc. A supplier with a dependability of supply strategy will be influential when choosing a tightly coupled relationship. HSCd. A supplier with a flexibility/service strategy will be influential when choosing a loosely coupled relationship. H30. Hhen a buying firs cospetes on the basis of flexibility/service, its choice of either a loosely or tightly coupled relationship will be influenced differently by the supplier’s cospetitive strategy: H3Da. A supplier with a low cost cospetitive strategy will be influential when choosing a loosely coupled relationship. HSDb. A supplier with a high quality product strategy will be influential when choosing a loosely coupled relationship. H3Dc. A supplier with a dependability of supply strategy will be influential when choosing a loosely-coupled relationship. HSDd. A supplier with a flexibility/service strategy will be influential when choosing a tightly coupled relationship. H4. The influence of product orientation factors,. supplier profile factors, and cospetitive congruency factors will differ significantly when choosing a loosely coupled relationship. NS. The influence of product orientation factors, supplier profile factors, congruency factors will differ significantly when choosing a tightly coupled relationship. its choice of IOFQ IOFB IO?! .0?! sore IOFE IOFE IOFE and cospetitive Page 4 of 6 In sussary, the first set of hypotheses should test the type and influence of product orientation factors, supplier profile factors, cospetitive factors when choosing loosely and tightly coupled relationships. HYPOTHESES OF SOURCE SELECTION CRITERIA FOR EVALUATING POTENTIAL LOOSELY AND TIGHTLY COUPLED SUPPLIERS This set of research hypotheses will test the type and isportance of the source selection criteria used in evaluating both loosely and tightly coupled suppliers: H6. Sisilar isportance will be placed on conditional source selection criteria when evaluating a potential loosely or tightly coupled supplier: Hba. A low price criterion will have sisilar isportance when evaluating a potential loosely or tightly coupled supplier. (Please return this page) 135 Michigan State University H7. H8. H6b I H6c. More A high quality criterion will have sisilar isportance when evaluating a potential loosely or tightly coupled supplier. A best delivery criterion will have sisilar isportance when evaluating a potential loosely or tightly coupled supplier. isportance will be placed on environsental source selection criteria when evaluating a supplier for a tightly coupled relationship than for a loosely coupled one: H7a. H7b. H7c. H7d. H7e. "7‘ I H7g. H7b. H7i. H7j. H7k. H71. H7a. H7n. Hore Ability to expand production capacity will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to cooperate when unforeseen difficulties occur will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to help in esergency situations will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Helpfulness to overcose errors will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Hillingness to provide repair services will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to provide a warranty policy will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to provide field technical services will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to provide aid and advice will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to provide training and educational aids will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to advise of potential probless will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Hillingness to adapt to specific needs will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Ability to offer a fasily of products will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Ability to anticipate buyer’s purchase requiresents will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Research and developsent capability will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. isportance will be placed on inforsational source selection criteria when evaluating a supplier for a tightly coupled relationship, then for a loosely coupled one: HBa. Production facility inforsation will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. (Please return this page) Page 5 of 6 136 Michigan State University H8b. HBc. H8d. H82. H8f. HBg. H8h. H81. H8j. H8k. H81. H8s. H9. There is a significant difference in the isportance assigned to the source selection criteria Production capacity inforsation will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Hillingness to provide 'rush' delivery services will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to provide frequent deliveries will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Hillingness to provide special handling will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Nillingness to provide price guarantees will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Hillingness to provide financial inforsation will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. A stable labor relation record will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Inforsation on a supplier's inventory control systes will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. Inforsation on a supplier’s quality control systes will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. inforsation on a supplier’s technical capability will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. A supplier’s proxisity to the buying firs’s final delivery location will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. A supplier's on-tise delivery history will be a sore isportant criterion when evaluating a supplier for a tightly coupled relationship. used when evaluating a potential loosely coupled supplier. H10. There is a significant difference in the isportance assigned to the source selection criteria used when evaluating a potential tightly coupled supplier. Page 6 of 6 In sussary, the second set of hypotheses should test the type and isportance of different source selection criteria used when evaluating loosely and tightly coupled supplier. It is hypothesized that conditional source selection criteria will be isportant when evaluating both loosely and tightly coupled suppliers. However, it is suggested that the evaluation of a tightly coupled supplier will rely sore on environsental and inforsational source selection criteria. (Please return this page) I37 BUYER AND SELLER RELATIONSHIPS QUESTIONNAIRE PURPOSE OF THE QUESTIONNAIRE I am conducting a study on the subject of buyer and seller relationships to fulfill the dissertation require- ment for my Ph.D. degree. There are two primary objectives for this questionnaire. The first objective is to determine what factors influence the choice of a buyer and seller relationship by purchasing professionals. The second objective is to determine the relative inportance of certain source selection criteria when evalu- ating a potential supplier once the relationship has been chosen. Results of the study will be made available to you. These results should permit you to use the most influ- ential factors when choosing a buyer and seller relationship, and the most important source selection criteria when evaluating a potential supplier for different buyer and seller relationships. Enclosed is a post-card to request a sunnary of the results. DEFINITIONS OF BUYER AND SELLER RELATIONSHIPS The questionnaire does not use conventional terms of buyer and seller relationships (e.g., short-term, spot buying, long-term contracts; partners-in-excellence) since they may be viewed differently by various indus- tries. Therefore, the questionnaire uses the following terms and definitions of buyer and seller relation- ships: LOOSELY COUPLED RELATIONSHIP: The condition in which required input goods and services are purchased in a competitive environment such that one supplier can be played-off against another for short-term gains; disputes are resolved through legal interpretation of the contract; only limited informa- tion is exchanged with the supplier, and adjustments to operating and marketplace condi- tions are made by the buying and selling firms separately. TIGHTLY COUPLED RELATIONSHIP: The condition in which required input goods and services are purchased from one or a few dedicated suppliers; disputes are resolved through joint problem solving efforts; informa- tion which may affect the buying and/or selling firms' operations is exchanged to improve mutual productivity and to obtain lower overall costs; and adjustments to operating and marketplace conditions are made by the buying and selling firms jointly. PLEASE REFER TO THESE TERMS AND DEFINITIONS UHEN COMPLETING THE QUESTIONS ON THE FOLLOUING PAGES. GENERAL INSTRUCTIONS In the following pages, you will be requested to indicate the influence of certain factors when choosing the use of a buyer and seller relationships defined above, and the importance of certain source selection criteria when evaluating a potential supplier for the defined relationships. The last section contains questions regarding your purchasing activity so 1 can determine the proportion of these relationships currently used by U.S. manufacturing firms. Please be assured that your response will be held confidential. The results of this study will only be pub- lished in totals, and no individual or firm will be specifically identified. I want to thank you in advance for taking time to complete the questionnaire, and returning it to me in the enclosed envelope. Returning the the competed questionnaire by September 30, 1986, would be greatly appreciated. If you have any questions please call me at (517) 353-5415. Robert Landeros Doctoral Candidate Graduate School of Business Administration Michigan State University Page 1 of 5 138 Michigan State University FACTORS INFLUENCING THE CHOICE OF A BUYER AND SELLER RELATIONSHIP: Using the 5 point scale provided below, please circle the number corresponding to the degree of influence that the following INFLUENCING FACTORS (the center colum) have on your CHOICE to use a LOOSELY CGJPLED RELATIONSHIP (the left column) and a TIGHTLY COUPLED RELATIONSHIP (the right column): Never Seldom Sometimes Often Always Influential Influential ~ Influential Influential Influential 1 2 3 4 5 If, for example, "The purchase requirement is an off-the-shelf product or item" would always influence you to use a LOOSELY COUPLED RELATIONSHIP, please circle "5" in the left column; and if "The purchase requirement is an off-the-shelf product or item" would seldom influence you to use a TIGHTLY COUPLED RELATIONSHIP, then you should circle "2" in the right cohaun and so on for the balance of the INFLUENCING FACTORS. Degree of influence Degree of influence when choosing to use a , when chasing to use a LOOSELY COUPLED RELATIONSHIP Influencing Factors TIGHTLY COUPLED RELATIONSHIP 1 2 3 A 5 The purchase requirement is an off-the-shelf 1 2 3 A 5 product or item 1 2 3 4 S The purchase requirement is a specially designed 1 2 3 4 5 product or item The purchase requirement has a simple composition 1 2 3 4 5 or configuration (e.g., commercial stainless steel, 1 2 3 4 5 machined parts) The purchase requirement has a conplex conposition 1 2 3 A 5 or configuration (e.g., exotic stainless steel; 1 2 3 4 S sub-assemblies) 1 2 3 A 5 The purchase requirement has a standard application 1 2 3 4 5 (e.g., commercial fasteners) 1 2 3 A 5 The purchase requirement has a non-standard 1 2 3 A 5 application (e.g., newly designed component) 1 2 3 4 5 The purchase requirement will be needed in small 1 2 3 L 5 annual quantities 1 2 3 A 5 The purchase requirement will be needed in large 1 2 3 A 5 annual quantities 1 2 3 4 S The purchase requirement is estimated to have a low 1 2 3 L 5 annual dollar expenditure 1 2 3 4 5 The purchase requirement is estimated to have a 1 2 3 4 5 high annual dollar expenditure 1 2 3 A 5 The buying firm has had unsuccessful or no 1 2 3 4 5 experience with the supplier 1 2 3 A 5 The buying firm has had successful experience with 1 2 3 A 5 the supplier 1 2 3 A 5 The buying firm has low confidence in the products 1 2 3 A 5 available from the supplier 1 2 3 A 5 The buying firm has high confidence in the products 1 2 3 4 5 available from the supplier 1 2 3 A 5 The buying firm has low confidence in the 1 2 3 A 5 supplier's production process 1 2 3 4 5 The buying firm has high confidence in the suppli- 1 2 3 4 5 er's production process 1 2 3 A 5 The supplier is loosely coupled with its source of 1 2 3 4 5 supply 1 2 3 4 5 The supplier is tightly coupled with its source of 1 2 3 4 5 supply Page 2 of 5 139 Buyer and Seller Relationship Questionnaire Degree of influence Degree of influence when choosing to use a when choosing to use a LOOSELY CWPLED RELATIONSHIP Influencing Factors TIGHTLY chLED RELATIONSHIP 1 2 3 A 5 The supplier is loosely coupled with its channels 1 2 3 A 5 of distribution 1 2 3 A 5 The supplier is tightly coupled with its channels 1 2 3 4 5 of distribution The buying firm cospetes on the basis of low cost 1 2 3 4 5 and the supplier also cospetes on the basis of low 1 2 3 4 5 cost The buying firm competes on the basis of low cost 1 2 3 4 5 but the supplier competes on the basis of high 1 2 3 A 5 product quality The buying firm cospetes on the basis of low cost 1 2 3 A 5 but the supplier competes on the basis of depend- 1 2 3 4 5 ability of supply The buying firm competes on the basis of low cost 1 2 3 A 5 but the supplier competes on the basis of 1 2 3 4 S flexibility/service The buying firm competes on the basis of high pro- 1 2 3 4 5 duct quality but the supplier competes on the basis 1 2 3 A 5 of low cost The buying firm competes on the basis of high pro- 1 2 3 A 5 duct quality and the supplier also competes on the 1 2 3 6 5 basis of high product quality The buying firm competes on the basis of high pro- 1 2 3 4 5 duct quality but the supplier competes on the basis 1 2 3 A S of dependability of supply The buying firm competes on the basis of high 1 2 3 A 5 product quality but the supplier competes on the 1 2 3 4 5 basis of flexibility/service The buying firm competes on the basis of 1 2 3 4 5 dependability of supply but the supplier competes 1 2 3 A 5 on the basis of low cost The buying firm conpetes on the basis of 1 2 3 4 5 dependability of supply but the supplier competes 1 2 3 4 5 on the basis of high product quality The buying firm competes on the basis of 1 2 3 6 5 dependability of supply and the supplier also 1 2 3 4 5 competes on the basis of dependability of supply The buying firm competes on the basis of 1 2 3 A 5 dependability of supply but the supplier competes 1 2 3 4 5 on the basis of flexibility/service The buying firm competes on the basis of 1 2 3 A S flexibility/service but the supplier competes on 1 2 3 4 5 the basis of low cost The buying firm competes on the basis of 1 2 3 4 5 flexibility/service but the supplier competes on 1 2 3 A 5 the basis of high product quality The buying firm competes on the basis of 1 2 3 4 5 flexibility/service but the supplier educates on 1 2 3 A 5 the basis of dependability of supply The buying firm competes on the basis of 1 2 3 4 5 flexibility/service and the supplier also conpetes 1 2 3 A S on the basis of flexibility/service Page 3 of 5 140 MichiganStateUniversity SOURCE SELECTION CRITERIA UHEN EVALUATING LOOSELY AND TIGHTLY COUPLED SUPPLIERS: Using the 7 point scale provided below, please circle the number corresponding to the degree of inportance for the following SCAJRCE SELECTION CRITERIA (the center column) when you are EVALUATING a potential LOOSELY CWPLED SUPPLIER (tnc- left column) and a potential TIGHTLY COUPLED SUPPLIER (the right column): Extremely Slightly Slightly Extremely Uninportant Uninportant Uninportant Neutral Inportant Inportant Inportant 1 2 3 4 S 6 7 If, for example, "The potential supplier offers the lowest price" would be extremely important to you when evaluating a LOOSELY COUPLED SUPPLIER, please circle "7“ in the left column; and if "The potential supplier offers the lowest price" would be neutral to you when evaluating a potential TIGHTLY COUPLED SUPPLIER, then you should circle "4" in the right column, and so on for the balance of the SOURCE SELECTION CRITERIA. Degree of importance Degree of importance when evaluating a when evaluating a LmSELY CWPLED SUPPLIER Source Selection Criteria TIGHTLY CWPLED SUPPLIER 1 2 3 6 5 6 7 The potential supplier offers the lowest price 1 2 3 A 5 6 7 1 2 3 6 5 6 7 The potential supplier offers the highest quality 1 2 3 6 5 6 7 1 2 3 6 5 6 7 The potential supplier offers the best delivery 1 2 3 6 5 6 7 1 2 3 6 S 6 7 The potential supplier offers the ability to expand 1 2 3 4 5 6 7 production capacity 1 2 3 6 5 6 7 The potential supplier offers to cooperate when 1 2 3 4 5 6 7 unforeseen difficulties occur 1 2 3 6 5 6 “7 The potential supplier offers to help in emergency 1 2 3 6 5 6 7 situations 1 2 3 6 5 6 7 The potential supplier offers to help in overcoming 1 2 3 A 5 6 7 errors 1 2 3 6 5 6 7 The potential supplier offers to provide repair 1 2 3 6 5 6 7 services 1 2 3 A 5 6 7 The potential supplier offers to provide a warranty 1 2 3 6 5 6 7 Pol icy 1 2 3 4 5 6 7 The potential supplier offers to provide field 1 2 3 A 5 6 7 technical services 1 2 3 6 5 6 7 The potential supplier offers to provide aid and 1 2 3 A 5 6 7 advice 1 2 3 A 5 6 7 The potential supplier offers to provide training 1 2 3 L 5 6 7 and educational aids 1 2 3 6 S 6 7 The potential supplier offers to advise of 1 2 3 4 5 6 7 potential problems 1 2 3 A 5 6 7 The potential supplier offers to adapt to specific 1 2 3 6 5 6 7 needs of the buying firm 1 2 3 A 5 6 7 The potential supplier offers a family of products 1 2 3 4 S 6 7 1 2 3 6 S 6 7 The potential supplier offers to anticipate buyer's 1 2 3 A S 6 7 , purchase requirements 1 2 3 4 5 6 7 The potential supplier offers to perform research 1 2 3 A 5 6 7 and development 1 2 3 4 5 6 7 The potential supplier offers production facility 1 2 3 A 5 6 7 information 1 2 3 4 5 6 7 The potential supplier offers production capacity 1 2 3 L 5 6 7 information 1 2 3 A 5 6 7 The potential supplier offers to provide "rush" I 2 3 A 5 6 7 delivery services 1 2 3 A 5 6 7 The potential supplier offers frequent deliveries 1 2 3 4 5 6 7 Page 4 of 5 141 Buyer and Seller Relationship Questionnaire Degree of importance Degree of importance when evaluating a when evaluating a LOOSELY COUPLED SUPPLIER Source Selection Criteria TIGHTLY COUPLED SUPPLIER 1 2 3 4 5 6 7 The potential supplier offers special handling 1 2 3 4 5 6 7 1 2 3 4 5 6 7 The potential supplier offers price guarantees 1 2 3 6 5 6 7 1 2 3 6 5 6 7 The potential supplier offers financial information 1 2 3 4 5 6 7 1 2 3 4 5 6 7 The potential supplier offers a stable labor 1 2 3 4 5 6 7 relation record 1 2 3 4 5 6 7 The potential supplier offers information on its 1 2 3 L 5 6 7 inventory control system 1 2 3 4 5 6 7 The potential supplier offers information on its 1 2 3 4 5 6 7 quality control system 1 2 3 4 5 6 7 The potential supplier offers information on its 1 2 3 4 5 6 7 technical capabilities 1 2 3 4 5 6 7 The potential supplier offers to maintain produc- 1 2 3 A 5 6 7 tion or warehouse facilities near the buying firm 1 2 3 4 5 6 7 The potential supplier offers an on-time delivery 1 2 3 4 5 6 7 schedule PROPORTION OF LOOSELY AND TIGHTLY COUPLED RELATIONSHIPS CURRENTLY USED: The remaining questions pertain to the type of business done by your firm, division, buying site, etc.; the number of purchase orders or contracts currently under award by your firm, division, buying site, etc.; and the number of purchase orders or contracts which can be categorized as Loosely and Tightly Coupled Relationships: which one of the following is most descriptive of the business done by your firm, division, buying site, etc. (Please check only one): ‘ [1 Food and kindred products (SIC 20) I] Fabricated metal products (SIC 34) [1 Furniture and fixtures (SIC 25) [1 Machinery (except electrical) (SIC 35) [1 Paper and allied products (SIC 26) I] Electrical equipment and supplies (SIC 36) [1 Chemical and allied products (SIC 28) [1 Transportation equipment supplies (SIC 37) [I Rubber and plastics products (SIC 30) [1 Instruments and related products (SIC 38) [1 Primary metal industries (SIC 33) II Miscellaneous manufacturing industries (SIC 39) Please indicate Please estimate the total nurber of purchase orders or contracts awarded annually by your firm, division, buying site, etc. Please estimate the total number of LOOSELY COUPLED RELATIONSHIPS currently maintained by your firm, division, buying site, etc. Please estimate the total runber of TIGHTLY COUPLED RELATIONSHIPS currently naintained by your firm, division, buying site, etc. Page 5 of 5 lILZ hichigan State University Page 1 CRITIOUE OF QUESTIONNAIRE VALIDATION GROUP Consents and criticises on PURPOSE OF THE OUESTIONNAIRE section Consents and criticises on DEFINITIONS OF BUYER AND SELLER RELATIONSHIPS section (Please return this page) 143 Nichigan State University Page 2 Cannents and criticisns on GENERAL INSTRUCTIONS section Consents and criticisns on INFLUENCING THE CHOICE OF A BUYER AND SELLER RELATIONSHIPS section (Please return this page) 144 Michigan State University Page 3 Consents and criticises on SELECTION SELECTION CRITERIA NHEN EVALUATINB LOOSELY AND TIGHTLY COUPLED SUPPLIERS section Consents and triticisns on PROPORTION OF LOOSELY AND TIGHTLY COUPLED RELATIONSHIPS CURRENTLY USED section (Please return this page) 145 hichigan State University Page 4 General consents, criticisns and reconsendations on the questionnaire (Please return this page) APPENDIX B COVER LETTER AND QUESTIONNAIRE 146 MICHIGAN STATE UNIVERSITY GIADUA'I'E SCHOOL Of BUSINESS ADMINISTRATION EAST LANSING ‘ MICHIGAN - «826-1121 DEPARTMENT OF MANAGEMENT (5”) 553-5415 March 6, 1987 Dear Purchasing Professional: The enclosed survey questionnaire is part of a nationwide study being conducted by Mr. Robert Landeros to fulfill his Ph.D. degree requirements at Michigan State University. The study is partially funded by a Doctoral Grant from the National Association of Purchasing Management. Mr. Landeros' project is concerned with determining the factors that influence purchasers to choose either a tightly or loosely coupled working relationship with their suppliers, and the relative importance of different source selection criteria once the buyer/seller relationship has been established. The results of his project should provide you with comparative information about why purchasers choose different kinds of supplier relationships and key source selection criteria for each. Mr. Landeros would very much like to obtain your response to the enclosed questionnaire which has been pretested with a sample of purchasing profes- sionals in Michigan. The average time to complete the questionnaire is 45 minutes. Would you please complete the questionnaire by April 13th and return it to Mr. Landeros in the self-addressed, postage paid envelope. Please be assured that he will hold your response in the strictest confidence. Your reply is extremely important to the success of the research. Furthermore, Mr. Landeros will be pleased to send you a summary of the results. A post-card requesting the summary is enclosed. THANK YOU FOR SUPPORTING THIS IMPORTANT RESEARCH. Sincerely yours, ///~%% an; [K Robert M. Monczka Professor of Purchasing and Materials Management RMM/cjw Enclosures MSU is an Al/ivmtws Action/Equd‘Opporr-an‘ly Imam-tro- I47 BUYER/SELLER RELATIONSHIP QUESTIONNAIRE GRADUATE SCHOOL OF BUSINESS ADMINISTRATION MICHIGAN STATE UNIVERSITY PURPOSE OF THE QUESTIONNAIRE i . I am conducting a study on the subject of buyer/seller relationships to fulfill the dissertation requirement for my Ph.D. degree. The questionnaire has two objectives. The first is to determine what factors influence the choice of a buyer/seller relationship by purchasing professionals. The second is to determine the relative importance of certain source selection criteria when evaluating a potential supplier once the type of relationship has been chosen. The results of the study will provide you with information which should be useful when choosing a buyer/seller relationship. and when evaluating potential suppliers for different buyer/seller relationships. Enclosed is a post-card for you to request a summary of the results. The post-card may be enclosed with the completed questionnaire. or mailed separately. DEFINITIONS OF BUYER/SELLER RELATIONSHIPS The questionnaire does not use conventional terms usually associated with buyer/seller relationships (e.g., short-term. spot buying, long-term contracts. partners-in-excellence) since they may be viewed differently by purchasers in various industries. Therefore. the following terms and definitions of buyer/seller relationships have been established for the purposes of this questionnaire: LOOSELY COUPLED BUYER/SELLER RELATIONSHIP: The situatbn where required input goods and services are purchased in a competitive environment in which one supplier is often played~off against another for the buying firm's short-term benefits: disputes are resolved through unyielding negotiations: only limited information is exchanged with the supplier; and adjustments to operating and marketplace conditions are made separately by the buying and selling iirrns. TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP: The situation where required input goods and services are purchased from one or a few preferred suppliers; disputes are resolved through joint problem solving efforts; information which may affect the buying and/or selling firms' operations is exchanged to improve mutual productivity and to obtain lower overall costs; and adjustments to operating and marketplace conditions are made jointly by the buying and selling firms. PLEASE REFER TO THESE TERMS AND DEFINITIONS WHEN COMPLETING THE QUESTIONS ON THE FOLLOWING PAGES. GENERAL INSTRUCTIONS ln completing this questionnaire you will be requested to indicate the influence of certain factors on choosing to establish Loosely Coupled and Tightly Coupled Buyer/Seller Relationships. and the importance of certain source selection criteria when evaluating a potential supplier for both a Loosely Coupled and a Tightly Coupled Buyer/Seller Relationship. Finally. you will be asked to indicate the type of business done at your location, and the proportion of Loosely Coupled and Tightly Coupled Buyer/Seller Relationships established by your firm. division.buying site. etc. Please respond to these questions from the perspective of your buying assignment. Please be assured that your response will be held confidential. The results of this study will only be published in totals. and no individual or firm will be specifically identified. I want to thank you in advance for taking time to complete the questionnaire. and returning it to me in the enclosed envelope. It is important that the questionnaire be completed and returned by April 13, 1987. If you have any questions please call me at my Arizona State University Office. (602) 9656175. Robert Landeros Doctoral Candidate Graduate School of Business Administration Michigan State University 148 FACTORS INFLUENCING THE CHOICE OF A LOOSELY COUPLED BUYER/SELLER RELATIONSHIP: Using the 5 point scale provided below, please circle the number corresponding to the degree of influence that the INFLUENCING FACTORS have on your CHOICE to establish a LOOSELY COUPLED BUYER/SELLER RELATIONSHIP: Not a All Slightly Moderately Very Extremely Influential Influential influential Influential Influential 1 2 3 4 5 For example. if your judgment is that ‘The purchase requirement is an industry standard' is "Extremely Influential' on your choice to establish a LOOSELY COUPLED BUYER/SELLER RELATIONSHIP. please circle '5'. Continue in the same manner for the bal- ance of the lNFLUENClNG FACTORS. ' INFLUENCING FACTORS FOR A LOOSELY COUPLED BUYER/SELLER RELATIONSHIP DegreeOI Influence PURCHASE REQUIREMENT ORIENTATION The pmchase requirementisan-industry‘ standard 1 2 a 4. 5 [001] The purchase requirement is a custom-made product 1 2 3 4 5 [002] The purchase requirementirsesa simple production process 1 2 ’ 3 4 5. room The purchase requirement uses a complex production process 1 2 3 4 5 [004] The purchaserequirement is usedfora non-critical application 1 2 3 4 5 [0051 The purchase requirement is used for a critical application 1 2 3 4 5 [006] The purchase requirement is neededfor a short-duration of time 1- 2‘ 3 4" 5' [007] The purchase requirement is needed for a long duration of time 1 2 3 4 5 [000] The purchase requirement; is estimatedto be a lowdoilar expenditure ‘ 1 2 3 4— 5 [009] The purchase requirement is estimated to be a high dollar expenditure 1 2 3 4 5 [mo] PURCHASING OBJECTIVES OF THE BUYING FIRM , Reducingmstsassodatedwith the purchasedproducts oritems 1 2’ 3 4 S [01 1] Improving quality of purchased products or items 1 2 3 4 5 [012) Obtaining processtechnoiogyandinncvations from'suppliers I 1' 2 3 4 5 [Mill Obtaining product technology and innovations from suppliers 1 2 3 4 5 [014] 7 Reducing inventory levels ofpurohesed produdsoritems 1 ”1. 2' 3 4 5: [ms] Contributing to the reduction of the time hterval from product 1 2 3 4 5 [ore] design to availability of finished goods to the final customer 149 LOOSELY cg‘Jkflfig‘gflsgé‘é-lflflénousmL “9'“0' '""”°"°° CHARACTERISTICS OF THE POSSIBLE SUPPUERS 'i'l'rereiszmdeliveryxperformance historyforpossiblesuppli-s 7 ‘ 7 A 1 2 3 4 5 [0171 There is unsatisfactory delivery perfonnana history for possble suppliers 1 2 3 4 5 [ore] There is satisfactory defiveryperforrnaha hhtory forposableampiers 3' I '. , , 1 2 3 4 5 [019] There is no price history for possible suppliers 1 2 3 4 5 [0201 There isunsatisfactory price historyforposeble suppiera " 1' . 1 2 3 - .4 5 [0211 Thereissatisfaaorypriahistoryforpossble smpliers 1 2 3 4 s [0221 Thereisnoqualrtyperfonnancehstoryforpossblesuppfiers 1 2 3 4 5 10231 There is unsatisfactory quality perfonnana history for possble suppliers 1 2 3 4 5 1024] There is-satisfactory quality performance historytorpossble suppliers - z , 1 2 3 4 5 [0251 Financial information about possible suppliers is unavailable 1 2 3 4 5 1025] Financial hformatbnabompossblestppiiersstatestheirf'nancial strength ispoor. 1 2 3 4 5 [0271 Financial information about possible suppliers states their f'nancial strength is strong 1 2 3 4 5 [023] Thepmassmdinobgyuadbypossibiesupplienisuritmwn'mfliebuyhgaaivhy 1 2 3 4 5 [029] The process technology used by possible suppliers is simple 1 2 3 4 5 [030] The proassteclmologyusedbypossbleetppliersiscornpiex , 1 2 3 4 5 [031] CHARACTERISTICS OF THE SUPPLY MARKET There are only one or a few possble suppliers in the supply market 1 2 3 4 5 [0321 Therearenurneroussuppliersinthesupplymarket I ' ‘ ‘ ' 1 2 3 4 5 [033] The supply market experiences numerous technological advanaments 1 2 3 4 5 [0341 The supply market experiences fewtechmmial advancements 1 2 3 4 5 (0351 Demand is decreasing for the products or items available from the supply market 1 2 3 4 5 (0551 Demand isincreasingforthe productsoritemsavaiiablefromthesmplymarket 1 2 3 4 5 [037, There is a decrease in availability of products or items in the supply market 1 2 3 4 5 [033] Thereisariirxreasem~avdhbiiyofprodinsorhemshthesupplyma1ket 1 2 3 4 5 1059] 150 FACTORS INFLUENCING THE CHOICE OF A TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP: Using the 5 point scale provided below. please circle the number corresponding to the degree 'of influena that the INFLUENCING FACTORS have on your CHOICE to establish a ‘ITGHTLY COUPLED BUYER/SELLER RELATIONSHIP: Not at All Slightly Moderately Very Extremely Influential Influential Influential Influential Influential 1 2 ' 3 4 s For example. if your judgment is that 'The purchase requirement is an industry standard' is 'Slightly influentiai' on your choice to establish a TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP. please circle ‘2'. Continue in the same manner for the bal- ance of the INFLUENCING FACTORS. INFLUENCING FACTORS FOR A TIGHTLY COUPLED BUYERISELLER RELATIONSHIP DegreeOI Influence PURCHASE REOU IREMENT ORIENTATION The purchase requiremerrttis an ‘ndustry standard 1 2 3 4 5' [040] The purchase requirement is a custom-made product 1 2 3 4 S [041 j The purchase requiroment uses a simple production proass , 1 2 3 4 5 [0421 The purchase requirement uses acomplex production proass 1 2 3 4 5 (043] The purchase requirementisusedfor anorv-critialappliation 1 2 3 4 5 [044] The purchase requirement is used for a critical application 1 2 3 4 5 [0451 The purchase requirement is neededfor a short duration of time 1 2 3 4 5 [045] The purchase requirement is needed for a long duration of time 1 2 3 4 S [047] The purchase requirement-is estimatedto be a Iowdollar expenditure 1 2 3 4 5 [04a] The purchase requirement is estimated to be a high dollar expenditure 1 2 3 4 5 [0491 PURCHASING OBJECTIVES OF THE BUYING FIRM Reducing costs associated with the purchased productsor items 1 2 3 4 5 [0501 Improving quality of purchased products or items 1 2 3 4 5 [051] Obtaining proasstechnologyand rnnovatnnsfrom suppliers 1 2 3 4 5 [0521 Obtaining product technology and innovations from suppliers 1 2 3 4 5 [0531 Reducing inventory levelsol purchased‘products oritems ‘ 1 2 3 .. 4 5 [054] Contributing to the reduaion of the time interval from product 1 2 3 4 5 [055] design to availability of finished goods to the final customer 151 INFLUENCING FACTORS FOR A TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP 099'“ CI WIUGOOO CHARACTERISTICS OF THE POSSIBLE SUPPUERS There is nodelivery perfonnance historytor—possble suppliers .1 71 2 3 4 5 I056] There is unsatisfactory delivery perfonnana history'for possble suppliers I 2 3 4 5 I057I Trista issatisfactory del'nreryperformanahistoryforpoabiesuppliers 1 2 3 4 5 I058I There is no price history for possible suppliers 1 2 3 4 5 [059} Thank unsatisfaaoryzpricehistoryforpossblesuppliera- 1 2' '3 4 5 [060} There is satisfactory price history for possible suppliers 1 2 3 4 5 I061I Thereisnoqualityperformanahismryforpossbiesuppliers , 1 2 3 4 5 [062) There is unsatisfactory quality performance history for possible suppliers I 2 3 4 5 I003] There is satisfactory quality performance history for possible suppliers 1 I 2 3 4 5 l064! Financial information about possble suppliers isunavailable 1 2 3 4 5 [0851 Financial information aboutpossble stpplicrs states theirf'rnancial strength‘is poor 1 2 3 4 5 I066] Financial information about possble suppliers states their financial strength isstrong 1 2 3 4 5 I067] Thepmasstechmbgyuadbypasbbsuppliersisurknountothebwmgactivity 1 2 3 4 5 I068] The process technology used by possble suppliers is sinple 1 2 3 4 5 I069] The process technology used by possble suppliers is complex - 1 2 3 4 5 I070] CHARACTERISTICS OF THE SUPPLY MARKET There are only one or a few possible suppliers in the supply market 1 2 3 4 5 i071] There are numeroussuppiiers in the supply market , I 2 3 4 5 1072] The supply market experienas numerous technological advanaments I 2 3 4 5 [073] The supply market experiences few technobgicai advanaments I 2 3 4 5 [0741 Demand is decreasing forthe products or items available from the supply market I 2 3 4 5 mm Demand is increas'ng‘fcr the products or items avaiable from the apply market 1 ‘ 2 3 4 5 I076) There isadecrease in availabilityofproductsoritems in the supply market 1 2 3 4 5 ram Thereisan increaseinavailabilitycfproducts or'nemsinthesuppb/ market 1 2 3 4 5 I°7BI 152 SOURCE SELECTION CRITERIA IMPORTANCE WHEN EVALUATING A POTENTIAL SUPPLIER FOR A LOOSELY COUPLED BUYER/SELLER RELATTONSHIP: Using the 5 point scale provided below. please circle the number corresponding to the relative importance of the following SOURCE SELECTION CRITERIA when you are EVALUATING a potential supplier for a LOOSELY COUPLED BUYER/SELLER RELA- TIONSHIP: Slightly Moderately Very Extremely Unimportant Important Important Important . Important 1 2 3 4 ' 5 For example. if a potential supplier ‘Ouotes the lowest price' and if this would be 'Extremely lmportant" to you when evaluating the supplier for a LOOSELY COUPLED BUYER/SELLER RELATIONSHIP, please circle '5'. Continue in the same manner for the balance of the SOURCE SELECTION CRITERIA. SOURCE SELECTION CRITERIA FOR EVALUATING A SUPPLIER FOR A LOOSELY COUPLED BUYERISELLER RELATTONSlILP Relative Importance Quotes thelowest price. Has a sound financial condition Provides manufacturing costinformmion Provides favorable payment terms Provides price guarantees for a relevmt timeperiod [can] Offers the required quality [004] Uses statistial process control [035] Has had few in-coming inspection rejections [0.5; Provides repair services [can Provides a product warranty [one] Provides technical field services [009] Provides qual'ny control performance information [090] Offers the best possbledelivery lead-time [091] Maintains on-time delivery schedules [0921 Provides 'rush' deliveries loss] Provides frequent deliveries 1094) Provides special handling [as] Maintains plant or warehouse near your location [096] Has available production capacity , [097] Has the ability to expand production capacity Updates production capacity availability [oeej Cooperates when unforeseen dl‘f'lculties occur [100] Helps in emergency situations . 4. [101] Helps' .n overaming buying company's errors [102] Advisesof product or item unavailability ‘- [103] Adapts to specific needs of the buying firm [104] Offers a family of products ' [105] Anticipates future purchase requirements Performs research and development on-itsproaases Performs research and development on its products Provides ‘on-going' production status information . 1 Provides a labor relation record free of strikes or work-stoppages Provides information on finished-goodsinventory-levels , - [1015i [1071 I100] I‘09I (110] [111] “sagas“-.._._._._._._._..._..._..._._._._._._..._..u......_...as...“ NNNNN-NMNNNMNNNNMNNNNNNNNNNNNNNNNNNMNNMN orcommemoratemum'uuwuuouuuuuuuwuuuouuuuaamuse hbOL§bhbb‘h§b§#bvbb#bb¥b&bb&bh®b&&##b#bbk atormorermorurrnurchinmmmmmmmmmmmmmmmarmorrnmutororuturmur 3, Provides Electronic Data Interchange (EDI) apailties [1121 Provides bar-coding capabilities -~ [1 13] Has productivity improvement potential [114] Has ecapabie managementteam (115] Has a cooperative business philosophy [1 is] Has aheldulsalesforce ‘ l [1171 153 SOURCE SELECTION CRITERIA IMPORTANCE WHEN EVALUATING A POTENTIAL SUPPUER FOR A TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP: Using the 5 point scale provided below. please circle the number corresponding to the relative importance of the following SOURCE SELECTION CRITERIA when you are EVALUATING a potential supplier for a TIGHTLY COUPLED BUYERISELLER RELA- TIONSHIP: Slightly Moderately Very Extremely Unimportant Important Important Important Important 1 2 3 4 5 I For example. if a potential supplier 'Ouotes the lowest price“ and if this would be "Unimportant” to you when evaluating the supplier for a TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP. please circle '1'. Continue in the same manner forthe balance of the SOURCE SELECTION CRITERIA. SOURCE SELECTION CRITERIA FOR EVALUATING A SUPPLIER FOR A TIGHTLY COUPLED BUYER/SELLER RELATTONSHIP Relative Importance Quotes the lowest pria ‘ 1 1 2 ‘3 4 5 [113] Has a sound financial condition 1 2 3 4 5 [1191 Provides manufaauring costinformatlon 1 2 3 4 5 [120] Providesfavorable payment terms 1 2 3 4 5 [1211 Provides prrce guarantees for-a relevant time period 1 2 3 4 5 (122) Offers the required quality 1 2 3 4 5 [123] Uses statistical processtoontrol . 7 . 7 1 2 3 4 5 [124] Has had few in-coming inspection rejections 1 2 3 4 5 [1251 Provides repairservicas‘ .. 1 2 3 '4 5 [1251 Provides a product warranty 1 2 3 4 5 (1271 Provides technical field services 1 2 .3 4 5 [128] Provides quality control performance information 1 2 3 4 5 [129] Offers the bestpossble delivery lead-time 1 2 3 4 5 [130] Maintains onvtime delivery schedules 1 2 3 4 5 [1311 Provides 'rush' deliveries " , 1 2 3 4 5 [1321 Provides frequent deliveries 1 2 3 4 5 [133] Providesspecial handling 1 2 3 4 5 [134] Maintains plant or warehouse near your location 1 2 3 4 5 [135] Has available productioncapacity . y 1 2 3 4 5 [1351 Has the ability to expand production capacity 1 2 3 4 5 [137] Updates productioncapeoityavailability 1 2 3 4 5 [133] Cooperates when unforeseen dificulties occur 1 2 3 4 5 [139) Helpsziin emergency situat’onsé ' , 1 2 3 4 5 (140] Helps in overcoming buying company's enors 1 2 3 4 5 1m] Advisescf product oritemunavailabilityit 1 ' 2 3' 4 5 [142] Adapts to specific needs of the buying firm 1 2 3 4 5 [143] Offers afamily of products 1 2 3 4 5 [m] Anticipates future purchase requirements 1 2 3 4 5 [145] Performs research and development on :its processes 1 2 3 4 5 [146] Performs research and development on its products 1 2 3 4 5 [147) Provides r'on-going‘ production status information 1 2 3 4 5 [1481 Provides a labor relation record free of strikes or work-stoppages 1 2 3 4 5 [149) Provbes finished-goods inventory level information; 1 I 2 3 4 5 1150] Provides Electronic Data Interchange (EDI) capabilities 1 2 3 4 5 1151] Provides bar-coding capabilities 1 2 3 4 5 [152) Has productivity improvement potential 1 2 3 4 5 [153) Has a capable management team 1 2 3 4 5 [154] Has a cooperative business philosophy 1 2 3 4 5 [155) Has a helpful sales force 1 2 3 4 5 [155] 154 NATURE OF YOUR BUSINESS ACTIVITY: Which one of the following is most descriptive of the business done at your location (e.g.. firm. division. buying site. etc.). Please check only one [157]: I] Feed and kindred products lsrc 20) E] Fabricated metal products (SIC 34) E] Fumitureandfnrtures (SIC 25) E] Machinery (except electrical) (src 35) [1 Paper and allied products (SIC 26) E] Electrical equipment and supplies (SIC as) [:1 Chemical and Allied Products (SIC 28) El Transportation Equipment (SIC 37) E] Rubberandplasticaproducts(SlC 30) j] Instruments and related products (SIC as) [:1 Primary metal industries (src 33) E] Miscellaneous manufacturing industries (SIC 39) Please indicate PROPORTION OF ESTABLISHED LOOSELY COUPLED AND TIGHTLY COUPLED BUYER/SELLER RELATTONSHIPS: Please estimate the percentage of purchase orders. contracts. etc. established by your firm. division. buying site. etc. which can be categorized as Loosely Coupled and Tightly Coupled Buyer/Seller Relationships; the percentage of suppliers which can be categorized as partic'pating in Loosely Coupled and Tightly Coupled Buyer/Seller Relationships; and the percentage of annual dollar expenditures for Loosely Coupled and Tightly Coupled Buyer/Seller Relationships: Percent of Percent of Percent of Contracts Suppliers Dollar Expenditures LOOSELY COUPLED BUYER/SELLER RELATIONSHIPS: zones) 1. [159) 17.11er TIGHTLY COUPLED BUYER/SELLER RELATIONSHIPS: Vener] % (taZj %(1ac| TOTALS: 100 °/e 100 °/e 100 °/e APPENDIX C GEARY NUMBER TABLES 155 TABLE C-l RANKING OF GEARY TEST NUMBERS OF FACTORS INFLUENCING THE CHOICE OF A LOOSELY COUPLED BUYER/SELLER RELATIONSHIP Geary Number 1. The Purchase Requirement ls Used for a Critical Application 0.90 2. Improving Quality of Purchased Products of Items 0.89 3. The Purchase Requirement la a Custom-Made Product 0.89 4. The Purchase Requirement Uses a Complex Production Process 0.88 5. There are Only One or a Few Suppliers in the Supply Market 0.88 6. There is a Decreasing in Availability of Products or Items in the Supply Market 0.87 7. The Purchase Requirement ls Estimated to be a High Dollar Expenditure 0.87 8. Reducing Inventory Levels of Purchased Products or Items 0.86 9. Obtaining Process Technology and Innovations from Suppliers 0.86 10. Financial Information About Possible Suppliers States Their Financial Condition is Poor 0.86 11. There are Numerous Suppliers in the Supply Market 0.86 12. Obtaining Product Technology and Innovations from Suppliers 0.85 13. The Purchase Requirement is Needed for a Long Duration of Time 0.85 14. There is an Increasing in Availability of Products or Items in the Supply Market 0.85 15. Demand is Decreasing for the Products or Items Available from the Supply Market 0.85 16. Contributing to the Reduction of the Time Interval from Product Design to Availability of Finished Goods to the Final Customer 0.84 17. Demand is Increasing for the Products or Items Available from the Supply Market 0.84 18. There is Satisfactory Price Performance History for Possible Suppliers 0.84 19. There is Satisfactory Quality Performance History for Possible Suppliers 0.84 156 TABLE C-l (Cont’d.) Geary Number 20. There is No Quality Performance History for Possible Suppliers 0.84 21. There is Satisfactory Delivery Performance History for Possible Suppliers 0.83 22. The Purchase Requirement is Used for a Non-Critical Application 0.83 23. The Purchase Requirement is Estimated to be a Low Dollar Expenditure 0.83 24. The Supply Market Experiences Numerous Technological Advancements 0.83 25. The Purchase Requirement is an Industry Standard 0.82 26. The Purchase Requirement is Needed for a Short Duration of Time 0.82 27. Financial Information About Possible Suppliers States Their Financial Condition is Strong 0.82 28. There is Unsatisfactory Price Performance History for Possible Suppliers 0.82 29. There is Unsatisfactory Quality Performance History for Possible Suppliers 0.81 30. The Purchase Requirement Uses a Simple Production Process 0.81 31. The Process Technology Used by Possible Supplier is Complex 0.81 32. The Process Technology Used by Possible Supplier is Unknown to the Buying Activity 0.80 33. Reducing Cost Associated with the Purchased Products or Items 0.80 34. Financial Information About Possible Suppliers is Unavailable 0.79 35. There is Unsatisfactory Delivery Performance History for Possible Suppliers 0.78 36. The Process Technology Used by Possible Supplier is Simple 0.78 37. The Supply Market Experiences Few Technological Advancements 0.78 38. There is No Delivery Performance History for Possible Suppliers 0.76 39. There is No Price Performance History for Possible Suppliers 0.75 157 TABLE C-2 RANKING OF GEARY TEST NUMBERS OF SOURCE SELECTION CRITERIA IMPORTANCE WHEN EVALUATING A POTENTIAL LOOSELY COUPLED SUPPLIER Geary Number 1. Provides Favorable Payment Terms 0.98 2. Provides Quality Control Performance Information 0.85 3. Provides Electronic Data Interchange (EDI) Capabilities 0.85 4. Has Available Production Capacity 0.84 5. Has a Capable Management Team 0.84 6. Helps in Overcoming Buying Company Errors 0.84 7. Adapts to Specific Needs of the Buying Firm 0.84 8. Provides Frequent Deliveries 0.84 9. Provides Technical Field Services 0.83 10. Provides a Product Warranty 0.83 11 Has a Sound Financial Condition 0.83 12. Has a Cooperative Business Philosophy 0.83 13. Provides Special Handling 0.82 14 Provides Information on Finished-Goods Inventory Levels 0.82 15. Offers the Required Quality 0.81 16. Advises of Product or Item Unavailability 0.81 17. Uses Statistical Process Control 0.81 18. Has a Helpful Sales Force 0.80 19. Offers a Family of Products 0.80 20 Provides Repair Services 0.80 21 Maintains On-Time Delivery Schedules 0.80 22. Performs Research and Development on its Products 0.79 23 Has the Ability to Expand Production Capacity 0.79 24 Performs Research and Development on its Processes 0.79 25. Provides Manufacturing Cost Information 0.79 26. Has Productivity Improvement Potential 0.79 27. Provides a Labor Relation Record Free of Strikes or Work-Stoppages 0.79 28 Provides Bar-Coding Capabilities 0.79 29 Maintains Plant or Warehouse Near the Buying Location 0.78 30. Provides "On-Going" Production Status Information 0.77 31 Helps in Emergency Situations 0.77 32. Anticipates Future Purchase Requirements 0.75 33 Provides Price Guarantees for a Relevant Time Period 0.75 34 Updates Production Capacity Availability 0.74 35. Cooperates When Unforeseen Difficulties Occur 0.73 36. Quotes the Lowest Price 0.73 37 Has Had Few In-Coming Inspection Rejections 0.72 38. Provides "Rush" Deliveries 0.71 39. Offers the Best Possible Delivery Lead-Time 0.69 158 TABLE C-3 RANKING OF GEARY TEST NUMBERS OF FACTORS INFLUENCING THE CHOICE OF A TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP Geary Number 1. There is No Quality Performance History for Possible Suppliers 0.85 2. Financial Information About Possible Suppliers States Their Financial Condition is Poor 0.84 3. Financial Information About Possible Suppliers States Their Financial Condition is Strong 0.84 4. The Purchase Requirement is an Industry Standard 0.84 5. Improving Quality of Purchased Products of Items 0.84 6. There is Satisfactory Price Performance History for Possible Suppliers 0.84 7. The Purchase Requirement Uses a Simple Production Process 0.84 8. There is Satisfactory Delivery Performance History for Possible Suppliers 0.83 9. The Purchase Requirement is Estimated to be a Low Dollar Expenditure 0.83 10. The Purchase Requirement is Used for a Non-Critical Application 0.83 11. There is No Delivery Performance History for Possible Suppliers 0.83 12. The Purchase Requirement is Needed for a Short Duration of Time 0.83 13. Demand is Decreasing for the Products or Items Available from the Supply Market 0.83 14. The Purchase Requirement is a Custom-Made Product 0.82 15. The Purchase Requirement is Used for a Critical Application 0.82 16. The Process Technology Used by Possible Supplier is Complex 0.81 17. There is Unsatisfactory Price Performance History for Possible Suppliers 0.81 18. The Process Technology Used by Possible Supplier is Simple 0.81 19. There are Only One or a Few Suppliers in the Supply Market 0.81 20. There is an Increasing in Availability of Products or Items in the Supply Market 0.80 21. The Supply Market Experiences Numerous Technological Advancements 0.80 22. There are Numerous Suppliers in the Supply Market 0.80 23. There is No Price Performance History for Possible Suppliers 0.79 159 TABLE C-3 (Cont’d.) Geary Number 24. Reducing Cost Associated with the Purchased Products or Items 0.79 25. The Purchase Requirement is Estimated to be a High Dollar Expenditure 0.79 26. The Process Technology Used by Possible Supplier is Unknown to the Buying Activity 0.78 27. Financial Information About Possible Suppliers is Unavailable 0.78 28. There is Satisfactory Quality Performance History for Possible Suppliers 0.78 29. Reducing Inventory Levels of Purchased Products or Items 0.78 30. Obtaining Process Technology and Innovations from Suppliers 0.78 31. The Supply Market Experiences Few Technological Advancements 0.77 32. There is Unsatisfactory Quality Performance History for Possible Suppliers 0.76 33. There is a Decreasing in Availability of Products or Items in the Supply Market 0.76 34. Obtaining Product Technology and Innovations from Suppliers 0.76 35. Demand is Increasing for the Products or Items Available from the Supply Market 0.74 36. The Purchase Requirement Uses a Complex Production Process 0.74 37. There is Unsatisfactory Delivery Performance History for Possible Suppliers 0.73 38. Contributing to the Reduction of the Time Interval from Product Design to Availability of Finished Goods to the Final Customer 0.73 39. The Purchase Requirement is Needed for a Long Duration of Time 0.72 160 TABLE C-4 RANKING OF GEARY TEST NUMBERS OF SOURCE SELECTION CRITERIA IMPORTANCE WHEN EVALUATING A POTENTIAL TIGHTLY COUPLED SUPPLIER Geary Number 1. Uses Statistical Process Control 0.86 2. Cooperates When Unforeseen Difficulties Occur 0.86 3. Provides Bar-Coding Capabilities 0.86 4. Helps in Emergency Situations 0.85 5. Maintains On-Time Delivery Schedules 0.85 6. Quotes the Lowest Price 0.85 7. Provides Special Handling 0.84 8. Provides Manufacturing Cost Information 0.84 9. Updates Production Capacity Availability 0.84 10. Provides Frequent Deliveries 0.84 11 Provides Electronic Data Interchange (EDI) Capabilities 0.84 12. Provides a Labor Relation Record Free of Strikes or Work-Stoppages 0.84 13. Anticipates Future Purchase Requirements 0.83 14 Performs Research and Development on its Processes 0.83 15. Provides "On-Going" Production Status Information 0.83 16. Provides Repair Services 0.83 17. Has Productivity Improvement Potential 0.83 18. Provides Favorable Payment Terms 0.83 19. Performs Research and Development on its Products 0.83 20 Offers the Required Quality 0.82 21. Has the Ability to Expand Production Capacity 0.82 22. Maintains Plant or Warehouse Near the Buying Location 0.82 23. Provides Information on Finished-Goods Inventory Levels 0.81 24. Provides Price Guarantees for a Relevant Time Period 0.81 25. Has a Cooperative Business Philosophy 0.80 26. Provides Technical Field Services 0.80 27 Helps in Overcoming Buying Company Errors 0.79 28 Provides Quality Control Performance Information 0.79 29. Has Had Few In-Coming Inspection Rejections 0.79 30. Has Available Production Capacity 0.79 31. Provides a Product Warranty 0.79 32. Provides ”Rush" Deliveries 0.78 33. Offers the Best Possible Delivery Lead-Time 0.77 34 Has a Capable Management Team 0.77 35. Offers a Family of Products 0.76 36. Has a Helpful Sales Force 0.74 37. Advises of Product or Item Unavailability 0.73 38. Has a Sound Financial Condition 0.72 39. Adapts to Specific Needs of the Buying Firm 0.70 161 TABLE C-5 RANKING OF GEARY TEST NUMBERS OF PERCENTAGES FOR LOOSELY COUPLED BUYER/SELLER RELATIONSHIPS Geary Number Percent of Contracts 0.90 Percent of Suppliers 0.87 Percent of Expenditures 0.81 TABLE C-6 RANKING OF GEARY TEST NUMBERS OF PERCENTAGES FOR TIGHTLY COUPLED BUYER/SELLER RELATIONSHIPS Geary Number Percent of Contracts 0.90 Percent of Suppliers 0.87 Percent of Expenditures 0.81 APPENDIX D ESTIMATE OF GEARY NUMBER FOR TESTING NORMALITY 162 ESTIMATED 5 PERCENT PROBABILITY POINTS FOR GEARY (1‘) TEST Figure D-l was plotted from Geary’s Table F (p. 330) which suggest that the 5 percent probability points are logarithm. Therefore, the following logarithmic regression formula was to estimate the required probability points for this dissertation: Pi = a + b‘InN where, N = Sample size, and 0.88479 a b 0.01113 for the upper 5 percent level (I‘U) with an r2 = 0.9884; a = 0.71708 b = 0.01031 for the lower 5 percent level (P1) with an r2 = 0.9821; and a = 0.80361 0 = 0.00082 for the mean of (I‘M) with an r2 = 0.9605; which resulted in the following table (See Figure D-2 for plotting of Estimated F’s): N Upper 5% Mean Lower 5% 630 0.8130 0.7983 0.7835 647 0.8127 0.7983 0.7838 650 0.8127 0.7983 0.7839 668 0.8124 0.7983 0.7841 669 0.8124 0.7983 0.7842 670 0.8123 0.7983 0.7842 671 0.8123 0.7983 0.7842 672 0.8123 0.7983 0.7842 67 3 0.8123 0.7983 0.7842 674 0.8123 0.7983 0.7842 67 5 0.8123 0.7983 0.7842 sea-:I ~;-. 163 FIGURE D-l 5 PERCENT PROBABILITY POINTS—GEARY NUMBER“ OaatyNuII-bers p e a - 1 1:1 - 0.73 - t r I I I I I 0.4 0.6 0.8 1 (Thousands) Sempts SI:- D Upper M + Means 0 Lower 58 FIGURE F-2 5 PERCENT PROBABILITY POINTS—ESTIMATED GEARY can 0+ 05,; - —°-—'L W as: .1 once 11 once 4 once -1 0.302 -‘ 0.5 - 0.7.5 ¢ v v v v v ; 3 v ones m c.7s4 --1 0.792 4+ 0.79 4 0.733 1» c.7as J, 0.7“ ¢ ¢ : t i t: ¢ i 0733 I I I I r I I I 530 640 ‘50 660 570 Sample Sb- 0 Upper 8! + Means 0 Lower 63 Osaly Numbers ‘R.C. Geary, "The Ratio of the Mean Deviation to the Standard Deviation as a Test of Normality," Bigmgtrika, October 1935, p. 330. APPENDIX E t—TESTS RESULT FOR PERCENTAGES OF BUYER/SELLER RELATIONSHIPS BY INDUSTRIES 164 TABLE E-l RANKING OF MATCHED t-TESTS RESULTS FOR THE PERCENT OF CONTRACTS Mean. Mean t-value P d.f U.S. Manufacturing Firms in the Sample 45.678 54.092 '3.48 0.001 629 Chemical and Allied Products (SIC 28) 39.695 60.305 -2.44 0.018 58 Furniture and Fixtures (SIC 25) 36.500 63.500 -2.31 0.036 15 Instruments and Related Products (SIC 38) 41.810 58.190 -2.18 0.033 57 Electrical Equipment and Supplies (SIC 36) 45.831 54.169 -1.63 0.106 135 Paper and Allied Products (SIC 26) 35.417 64.583 -1.41 0.185 11 Miscellaneous Manufacturing Industries (SIC 39) 45.273 54.727 '1.02 0.314 43 Rubber and Plastics Products (SIC 30) 43.933 53.233 -0.79 0.438 29 Machinery (Except Electrical) (SIC 35) 46.537 53.463 -0.73 0.468 40 Food and Kindred Products (SIC 20) 46.387 53.613 -0.66 0.517 30 Primary Metals Industries (SIC 33) 53.350 46.650 +0.55 0.589 19 Fabricated Metal Products (SIC 34) 48.423 51.089 -0.50 0.621 122 Transportation Equipment (SIC 37) 51.483 48.517 +0.36 0.721 59 *Loosely Coupled Buyer/Seller Relationship 'sTightly Coupled Buyer/Seller Relationship 1 1 1 1 1 1 1 165 TABLE E-2 RANKING OF MATCHED t-TESTS RESULTS FOR THE PERCENT OF SUPPLIERS Mean. Means t-value P d.f U.S. Manufacturing Firms in the Sample 58.422 41.449 +7.51 0.000 649 Electrical Equipment and Supplies (SIC 36) 62.130 38.158 +5.25 0.000 138 Fabricated Metal Products (SIC 34) 58.294 41.389 +3.19 0.002 125 Instruments and Related Products (SIC 38) 60.721 39.279 +3.07 0.003 60 Rubber and Plastics Products (SIC 30) 61.853 38.147 +2.43 0.021 33 Chemical and Allied Products (SIC 28) 57.717 40.717 +2.11 0.039 59 Transportation Equipment (SIC 37) 57.117 42.883 +1.85 0.069 59 Miscellaneous Manufacturing Industries (SIC 39) 57.800 42.200 +1.71 0.095 44 Food and Kindred Products (SIC 20) 58.419 41.581 +1.52 0.139 30 Machinery (Except Electrical) (SIC 35) 54.167 45.833 +0.97 0.338 41 Furniture and Fixtures (SIC 25) 50.500 50.056 +0.04 0.965 17 Paper and Allied Products (SIC 26) 50.000 50.000 +0.00 1.000 13 Primary Metals Industries (SIC 33) 50.000 50.000 +0.00 1.000 19 .Loosely Coupled Buyer/Seller Relationship sTightly Coupled Buyer/Seller Relationship 166 TABLE E-3 RANKING OF MATCHED t-TESTS RESULTS FOR THE PERCENT OF EXPENDITURES 5 Mean* Mean t-value P d.f U.S. Manufacturing Firms in the Sample 34.294 65.804 -17.49 0.000 646 Paper and Allied Products (SIC 26) 75.769 24.231 +9.74 0.000 12 Rubber and Plastics Products (SIC 30) 26.394 73.606 -8.33 0.000 32 Furniture and Fixtures (SIC 25) 29.056 70.944 -7.97 0.000 17 Chemical and Allied Products (SIC 28) 30.300 68.867 -7.27 0.000 59 Electrical Equipment and Supplies (SIC 36) 36.142 63.929 -7.26 0.000 140 Fabricated Metal Products (SIC 34) 36.621 63.202 -5.85 0.000 123 Instruments and Related Products (SIC 38) 33.803 66.197 -5.81 0.000 60 Miscellaneous Manufacturing Industries (SIC 39) 31.021 68.979 -5.49 0.000 46 Transportation Equipment (SIC 37) 35.000 65.000 -4.36 0.000 56 Machinery (Except Electrical) (SIC 35) 37.238 65.738 -4.34 0.000 41 Food and Kindred Products (SIC 20) 36.226 63.774 -2.91 0.007 30 Primary Metals Industries (SIC 33) 41.100 58.900 -1.55 0.136 19 *Loosely Coupled Buyer/Seller Relationship sTightly Coupled Buyer/Seller Relationship APPENDIX F CONFIDENCE INTERVAL ESTIMATE TABLES 167 TABLE F-l RANKING OF CONFIDENCE INTERVAL ESTIMATES OF FACTORS INFLUENCING THE CHOICE OF A LOOSELY COUPLED BUYER/SELLER RELATIONSHIP AT A 10.005 MODEL PARAMETER 1'. Distribution Confidence Value 1-F(x) Interval 1. The Purchase Requirement is Used for a Critical Application 2.16 0.0154 98.46 2. The Purchase Requirement is a Custom-Made Product 2.23 0.0129 98.71 3. The Purchase Requirement is Estimated to be a High Dollar Expenditure 2.36 0.0091 99.09 4. The Purchase Requirement Uses a Complex Production Process 2.36 0.0091 99.09 5. Improving Quality of Purchased Products of Items 2.36 0.0091 99.09 6. The Purchase Requirement is Needed for a Long Duration of Time 2.44 0.0073 99.27 7. There are Only One or a Few Suppliers in the Supply Market 2.45 0.0071 99.29 8. There is Unsatisfactory Quality Performance History for Possible Suppliers 2.54 0.0055 99.45 9. Obtaining Product Technology and Innovations from Suppliers 2.54 0.0055 99.45 10. There is a Decrease in the Availability of Products or Items in the Supply Market 2.54 0.0055 99.45 11. Contributing to the Reduction of the Time Interval from Product Design to Availability of Finished Goods to the Final Customer 2.55 0.0054 99.46 12. Obtaining Process Technology and Innovations from Suppliers 2.55 0.0054 99.46 13. Financial Information About Possible Suppliers States Their Financial Condition is Poor 2.59 0.0048 99.52 14. Reducing Inventory Levels of Purchased Products or Items 2.60 0.0047 99.53 15. The Purchase Requirement is Estimated to be a Low Dollar Expenditure 2.64 0.0041 99.59 16. The Purchase Requirement is Used for a Non-Critical Application 2.69 0.0036 99.64 17. The Process Technology Used by Possible Supplier is Cemplex _ 2.70 0.0035 99.65 18. The Purchase Requirement is Needed for a Short Duration of Time 2.75 0.0030 99.70 19. There is Unsatisfactory Price Performance History for Possible Suppliers 2.75 0.0030 99.70 20. There are Numerous Suppliers in the Supply Market 2.76 0.0029 99.71 168 TABLE F-l (Cont’d.) t , Distribution Confidence Value 1-F(x) Interval There is Unsatisfactory Delivery Performance History for Possible Suppliers 2.76 0.0029 99.71 Financial Information About Possible Suppliers is Unavailable 2.81 0.0025 99.75 23. There is No Quality Performance History for Possible Suppliers 2.81 .0025 99.75 24. Demand is Increasing for the Products or Items Available from the Supply Market 2.82 .0024 99.76 25. Financial Information About Possible Suppliers States Their Financial Condition is Strong 2.82 .0024 99.76 26. The Process Technology Used by Possible Supplier is Simple 2.88 .0020 99.80 27. There is Satisfactory Quality Performance History for Possible Suppliers 2.88 .0020 99.80 28. Reducing Cost Associated with the Purchased Products or Items 2.89 .0019 99.81 29. There is No Price Performance History for Possible Suppliers 2.94 .0016 99.84 30. The Process Technology Used by Possible Supplier is Unknown to the Buying Activity 2.94 .0016 99.84 31. The Purchase Requirement is an Industry Standard 2.94 .0016 99.84 32. The Supply Market Experiences Numerous Technological Advancements 2.95 .0016 99.84 33. The Purchase Requirement Uses a Simple Production Process 3.01 .0013 99.87 34. There is Satisfactory Price Performance History for Possible Suppliers 3.01 .0013 99.87 35. Demand is Decreasing for the Products or Items Available from the Supply Market 3.01 .0013 99.87 36. There is Satisfactory Delivery Performance History for Possible Suppliers 3.01 .0013 99.87 37. There is No Delivery Performance History for Possible Suppliers 3.08 .0010 99.90 38. There is an Increasing in Availability of Products or Items in the Supply Market 3.16 .0008 99.92 39. The Supply Market Experiences Few Technological Advancements 3.16 .0008 99.92 169 TABLE F-2 RANKING OF CONFIDENCE INTERVAL ESTIMATES OF SELECTED FACTORS INFLUENCING THE CHOICE OF A LOOSELY COUPLED BUYER/SELLER RELATIONSHIP AT VARIOUS MODEL PARAMETER t Model Distribution Confidence Parameter Value 1-F(x) Interval The Purchase Requirement Uses a Complex Production Process $0.004 1.89 0.0314 96.86 Obtaining Product Technology and Innovations from Suppliers 10.004 2.03 0.0212 97.88 Obtaining Process Technology and Innovations from Suppliers t0.004 2.04 0.0207 97.93 Contributing to the Reduction of the Time Interval from Product Design to Availability of Finished-Goods to the Final Customer 30.004 2.04 0.0207 97.93 The Purchase Requirement is Estimated to be a Low Dollar Expenditure 10.004 2.11 0.0174 98.26 The Supply Market Experiences Few Technological Advancements $0.004 2.53 0.0057 99.43 Reducing Inventory Levels of Purchased Products or Items 10.003 1.56 0.0582 94.18 The Supply Market Experiences Numerous Technological Advancements 20.003 1.77 0.0384 96.16 The Purchase Requirement is a Custom- Made Product 10.002 0.89 0.1867 81.33 Financial Information About Possible Suppliers is Unavailable 10.002 1.12 0.1314 86.86 The Purchase Requirement is Estimated to be a High Dollar Expenditure $0.001 0.47 0.3192 68.08 The Purchase Requirement is Needed for a Short Duration of Time $0.001 0.55 0.2912 70.88 There is No Quality Performance History for Possible Suppliers 30.001 0.56 0.2877 71.23 Demand is Decreasing for the Products or Items Available from the Supply Market 10.001 0.60 0.2743 72.57 Financial Information About Possible Suppliers States Their Financial Condition is Strong £0.0005 0.28 0.3897 61.03 Demand is Increasing for the Products or Items Available from the Supply Market £0.0005 0.28 0.3897 61.03 170 TABLE F-3 RANKING OF CONFIDENCE INTERVAL ESTIMATES OF FACTORS INFLUENCING THE CHOICE OF A TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP AT A $0.005 MODEL PARAMETER t Distribution Confidence Value 1-F(x) Interval 1. Financial Information About Possible Suppliers States Their Financial Condition is Poor 2.54 0.0055 99.45 2. There is Unsatisfactory Quality Performance History for Possible Suppliers 2.59 0.0048 99.52 3. There is Unsatisfactory Price Performance History for Possible Suppliers 2.70 0.0035 99.65 4. The Purchase Requirement is an Industry Standard 2.82 0.0024 99.76 5. There is Unsatisfactory Delivery Performance History for Possible Suppliers 2.82 0.0024 99.76 6. There is No Quality Performance History for Possible Suppliers 2.88 0.0020 99.80 7. Financial Information About Possible Suppliers is Unavailable 2.94 0.0016 99.84 8. Demand is Decreasing for the Products or Items Available from the Supply Market 3.01 0.0013 99.87 9. There is No Delivery Performance History for Possible Suppliers 3.01 0.0013 99.87 10. There is No Price Performance History for Possible Suppliers 3.08 0.0010 99.90 11. The Process Technology Used by Possible Supplier is Unknown to the Buying Activity 3.08 0.0010 99.90 12. Financial Information About Possible Suppliers States Their Financial Condition is Strong 3.09 0.0010 99.90 13. The Process Technology Used by Possible Supplier is Complex 3.09 0.0010 99.90 14. The Purchase Requirement is Needed for a Short Duration of Time 3.15 0.0008 99.92 15. There is an Increasing in Availability of Products or Items in the Supply Market 3.16 0.0008 99.92 16. Reducing Inventory Levels of Purchased Products or Items 3.17 0.0008 99.92 17. The Process Technology Used by Possible Supplier is Simple 3.24 0.0006 99.94 18. There are Numerous Suppliers in the Supply Market ' 3.24 0.0006 99.94 19. There is Satisfactory Delivery Performance History for Possible Suppliers 3.24 0.0006 99.94 20. The Purchase Requirement Uses a Complex Production Process 3.32 0.0004 99.96 171 TABLE F-3 (Cont’d.) t Distribution Confidence Value 1-F(x) Interval 21. Obtaining Process Technology and Innovations from Suppliers 3.33 0.0004 99.96 22. The Purchase Requirement Uses a Simple Production Process 3.40 0.0003 99.97 23. The Purchase Requirement is Estimated to be a Low Dollar Expenditure 3.40 0.0003 99.97 24. There is Satisfactory Price Performance History for Possible Suppliers 3.40 0.0003 99.97 25. There is Satisfactory Quality Performance History for Possible Suppliers 3.41 0.0003 99.97 26. The Supply Market Experiences Numerous Technological Advancements 3.41 0.0003 99.97 27. Obtaining Product Technology and Innovations from Suppliers 3.41 0.0003 99.97 28. Contributing to the Reduction of the Time Interval from Product Design to Availability of Finished Goods to the Final Customer 3.42 0.0003 99.97 29. The Purchase Requirement is Needed for a Long Duration of Time 3.50 0.0002 99.98 30. Demand is Increasing for the Products or Items Available from the Supply Market 3.50 0.0002 99.98 31. The Supply Market Experiences Few Technological Advancements 3.50 0.0002 99.98 32. The Purchase Requirement is Used for a Non-Critical Application 3.59 0.0002 99.98 33. Reducing Cost Associated with the Purchased Products or Items 3.61 0.0002 99.98 34. There is a Decreasing in Availability of Products or Items in the Supply Market 3.71 0.0001 99.99 35. The Purchase Requirement is Estimated to be a High Dollar Expenditure 3.81 0.0001 99.99 36. The Purchase Requirement is a Custom-Made Product 3.92 0.0000 100.00 37. There are Only One or a Few Suppliers in the Supply Market 3.93 0.0000 100.00 38. The Purchase Requirement is Used for a Critical Application 4.18 0.0000 100.00 39. 4.64 0.0000 100.00 Improving Quality of Purchased Products of Items 172 TABLE F-4 RANKING OF CONFIDENCE INTERVAL ESTIMATES OF SELECTED FACTORS INFLUENCING THE CHOICE OF A TIGHTLY COUPLED BUYER/SELLER RELATIONSHIP AT VARIOUS MODEL PARAMETER t Model Distribution Confidence Parameter Value 1-F(x) Interval There is No Delivery Performance History for Possible Suppliers 10.002 1.20 0.1151 88.49 Contributing to the Reduction of the Time Interval from Product Design to Availability of Finished Goods to the Final Customer 10.002 1.37 0.0853 91.47 There is Unsatisfactory Price Performance History for Possible Suppliers $0.001 0.54 0.2946 70.54 There is No Price Performance History for Possible Suppliers $0.001 0.62 0.2676 73.24 The Purchase Requirement is Estimated to be a Low Dollar Expenditure 10.001 0.68 0.2483 75.17 The Purchase Requirement is Needed for a Long Duration of'Time $0.001 0.70 0.2420 75.80 Obtaining Product Technology and Innovations from Suppliers 10.0001 0.01 0.4960 50.40 Reducing Inventory Levels of Purchased Products or Items t0.0001 0.01 0.4960 50.40 173 TABLE F-5 RANKING OF CONFIDENCE INTERVAL ESTIMATES OF SOURCE SELECTION CRITERIA IMPORTANCE WHEN EVALUATING A LOOSELY COUPLED SUPPLIER ' AT A $0.005 MODEL PARAMETER Distribution Confidence Value 1'F(x) Interval 1. Uses Statistical Process Control 2.75 0.0030 99.70 2. Provides Bar'Coding Capabilities 2.94 0.0016 99.84 3. Maintains Plant or Warehouse Near the Buying Location 2.94 0.0016 99.84 4. Provides a Labor Relation Record Free of Strikes or Work-Stoppages 2.94 0.0016 99.84 5. Provides Electronic Data Interchange (EDI) Capabilities 2.94 0.0016 99.84 6. Provides Manufacturing Cost Information 2.94 0.0016 99.84 7. Provides Quality Control Performance Information 3.00 0.0013 99.87 8. Performs Research and Development on its Products 3.01 0.0013 99.87 9. Performs Research and Development on its Processes 3.01 0.0013 99.87 10. Provides Technical Field Services 3.07 0.0011 99.89 11. Provides Repair Services 3.08 0.0010 99.90 12. Has Productivity Improvement Potential 3.08 0.0010 99.90 13. Offers a Family of Products 3.08 0.0010 99.90 14. Provides Information on Finished-Goods Inventory Levels 3.15 0.0008 99.92 15. Provides Special Handling 3.15 0.0008 99.92 16. Updates Production Capacity Availability 3.23 0.0006 99.94 17. Has the Ability to Expand Production Capacity 3.23 0.0006 99.94 18. Anticipates Future Purchase Requirements 3.23 0.0006 99.94 19. Has a Capable Management Team 3.23 0.0006 99.94 20. Has Available Production Capacity 3.23 0.0006 99.94 21. Provides "On-Going" Production Status Information 3.23 0.0006 99.94 22. Adapts to Specific Needs of the Buying Firm 3.31 0.0005 99.95 23. Provides Frequent Deliveries 3.32 0.0004 99.96 24. Provides a Product Warranty 3.32 0.0004 99.96 25. Advises of Product or Item Unavailability 3.40 0.0003 99.97 26. Helps in Overcoming Buying Company Errors 3.40 0.0003 99.97 27. Provides Favorable Payment Terms 3.41 0.0003 99.97 28. Has a Cooperative Business Philosophy 3.50 0.0002 99.98 29. Provides Price Guarantees for a Relevant Time Period 3.50 0.0002 99.98 30. Has a Sound Financial Condition 3.50 0.0002 99.98 31. Helps in Emergency Situations 3.59 0.0002 99.98 32. Has Had Few In-Coming Inspection Rejections 3.60 0.0002 99.98 33. Has a Helpful Sales Force I 3.60 0.0002 99.98 34. Quotes the Lowest Price 3.60 0.0002 99.98 35. Provides "Rush" Deliveries 3.70 0.0001 99.99 36. Cooperates When Unforeseen Difficulties Occur 3.70 0.0001 99.99 37. Offers the Best Possible Delivery Lead-Time 3.80 0.0001 99.99 38. Offers the Required Quality 4.05 0.0000 100.00 39. Maintains On-Time Delivery Schedules - 4.05 0.0000 100.00 174 TABLE F-6 RANKING OF CONFIDENCE INTERVAL ESTIMATES OF SOURCE SELECTION CRITERIA IMPORTANCE WHEN EVALUATING A LOOSELY COUPLED SUPPLIER AT VARIOUS MODEL PARAMETERS t Model Distribution Confidence Parameter Value 1-F(x) Interval Provides a Product Warranty 20.003 1.99 0.0233 97.67 Provides Favorable Payment Terms 20.003 2.04 0.0207 97.93 Provides Special Handling $0.001 0.63 0.2643 73.57 Has a Sound Financial Condition $0.001 0.70 0.2420 75.80 Provides Quality Control Performance Information t0.0005 0.30 0.3821 61.79 Has a Capable Management Team 10.0005 0.32 0.3745 62.55 Advises of Product or Item Unavailability t0.00025 .17 0.4325 56.75 Has a Helpful Sales Force t0.00025 0.18 0.4286 57.14 0 175 TABLE F-7 RANKING OF CONFIDENCE INTERVAL ESTIMATES OF SOURCE SELECTION CRITERIA MPORTANCE WHEN EVALUATING A TIGHTLY COUPLED SUPPLIER AT A $0.005 MODEL PARAMETER Distribution Confidence Value 1-F(x) Interval 1. Provides Bar-Coding Capabilities 2.65 0.0040 99.60 2. Uses Statistical Process Control 2.76 0.0029 99.71 3. Maintains Plant or Warehouse Near the Buying Location 2.82 0.0024 99.76 4. Provides Electronic Data Interchange (EDI) Capabilities 2.82 0.0024 99.76 5. Offers a Family of Products 2.94 0.0016 99.84 6. Provides a Labor Relation Record Free of Strikes or Work-Stoppages . 3.09 0.0010 99.90 7. Performs Research and Development on its Products 3.16 0.0008 99.92 Provides Repair Services 3.16 0.0008 99.92 Provides Manufacturing Cost Information 3.16 0.0008 99.92 10. Performs Research and Development on its Processes 3.24 0.0006 99.94 11. Provides Information on Finished-Goods Inventory Levels 3.24 0.0006 99.94 12. Provides Quality Control Performance Information 3.24 0.0006 99.94 13. Has Productivity Improvement Potential 3.24 0.0006 99.94 14. Provides Frequent Deliveries 3.24 0.0006 99.94 15. Provides Technical Field Services 3.32 0.0004 99.96 16. Provides "On-Going" Production Status Information 3.32 0.0004 99.96 17. Updates Production Capacity Availability 3.32 0.0004 99.96 18. Quotes the Lowest Price 3.32 0.0004 99.96 19. Anticipates Future Purchase Requirements 3.32 0.0004 99.96 20. Provides a Product Warranty 3.32 0.0004 99.96 21. Provides Special Handling 3.40 0.0003 99.97 22. Has the Ability to Expand Production Capacity 3.50 0.0002 ' 99.98 23. Has Available Production Capacity 3.50 0.0002 99.98 24. Helps in Overcoming Buying Company Errors 3.50 0.0002 99.98 25. Provides Favorable Payment Terms 3.51 0.0002 99.98 26. Has a Sound Financial Condition 3.60 0.0002 99.98 27. Advises of Product or Item Unavailability 3.60 0.0002 99.98 28. Provides "Rush" Deliveries 3.70 0.0001 99.99 29. Has a Capable Management Team 3.80 0.0001 99.99 30. Offers the Best Possible Delivery Lead-Time 3.93 0.0000 100.00 31. Has a Helpful Sales Force 3.93 0.0000 100.00 32. Has Had Few In'Coming Inspection Rejections 3.93 0.0000 100.00 33. Adapts to Specific Needs of the Buying Firm 4.05 0.0000 100.00 34. Provides Price Guarantees for a Relevant Time Period 4.18 0.0000 100.00 35. Has a Cooperative Business Philosophy 4.32 0.0000 100.00 36. Cooperates When Unforeseen Difficulties Occur 4.80 0.0000 100.00 37. Helps in Emergency Situations 4.80 0.0000 100.00 38. Maintains On-Time Delivery Schedules 4.99 0.0000 100.00 39. Offers the Required Quality 4.99 0.0000 100.00 176 TABLE F-8 RANKING OF CONFIDENCE INTERVAL ESTIMATES OF SOURCE SELECTION CRITERIA IMPORTANCE WHEN EVALUATING A TIGHTLY COUPLED SUPPLIER AT VARIOUS MODEL PARAMETERS t Model Distribution Confidence Parameter Value 1-F(x) Interval Provides Frequent Deliveries 10.002 1.30 0.0968 90.32 Provides Favorable Payment Terms 10.002 1.40 0.0808 91.92 Provides Favorable Payment Terms 10.001 0.70 0.2420 75.80 Has the Ability to Expand Production Capacity 10.001 0.70 0.2420 75.80 Performs Research and Development on its Products 10.0005 0.32 0.3745 62.55 Provides Special Handling 10.0005 0.34 0.3669 63.31 Provides Price Guarantees for a Relevant Time Period 10.00025 0.21 0.4168 58.32 Has a Cooperative Business Philosophy 10.00025 0.22 0.4129 58.71 TABLE F-9 CONFIDENCE INTERVAL ESTIMATES FOR MEANS OF PERCENTAGES OF LOOSELY AND TIGHTLY COUPLED RELATIONSHIPS AT A 10.001 MODEL PARAMETER t Distribution Confidence Value 1-F(x) Interval Loosely Coupled Buyer/Seller Relationships Currently Used 2.07 0.0192 98.08 Loosely Coupled Suppliers Used 2.25 0.0122 98.78 Loosely Coupled Dollar Expenditures 2.81 0.0025 99.75 Tightly Coupled Buyer/Seller Relationships Currently Used 2.07 0.0192 98.08 Tightly Coupled Suppliers Used 2.25 0.0122 98.78 Tightly Coupled Dollar Expenditures 2.81 0.0025 99.75 REFERENCES REFERENCES Adkins, L. and Diller W., "Industry’s Quiet Revolution, "Dun’s Basiness Mgnth (June 1983: 72-75). 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