Dive Brief:
- New research from Penn State reveals that while hard skills such as the size and power of a firm are revered, trust, reciprocity and interpersonal relationships have a greater impact, Supply Chain Management Review reported Monday.
- Company size asymmetry, with its corresponding power asymmetry, can be misleading. Small suppliers doing business with a powerful company often seem vulnerable. However, sometimes it's the small company pressing the big company — such power asymmetries do occur in business.
- The researchers found relationships have more to do with imbalances in levels of trust, or how opportunistic the partner is perceived to be and how much there is to lose. Suppliers, in general, have more to lose in a relationship and therefore tend to distrust their larger partners more than buyers do.
Dive Insight:
Recent news lends support to the researchers' theory, as buyer initiatives to push supplier compliance appear less drastic and sudden than supplier actions to force buyer compliance.
In an age of brick-and-mortar bankruptcies, suppliers have resorted to various public actions to force payments from their struggling partners. When Payless Shoesource withheld payment from its suppliers, just a month before filing for bankruptcy, a number of its sources took to industry media to complain. Similarly, Sears Holdings and Central Grocers were subjected to strict terms of payments by suppliers, as signs of liquidity problems ramped up. In the latter's case, strict terms may have even been the straw that broke the grocer's back.
Meanwhile, buyers seem to take more incremental approaches when dealing with non-compliant suppliers.
In January, when Target began an initiative to dispense with hazardous chemicals, it also determined how it would encourage suppliers to comply with the new policy. Any time a supplier resorted to the use of a vague or uncertain term to describe an ingredient of uncertain provenance, the chain's Sustainable Product Index will cap its score at 25, or half of a potential 50 points.
The idea is a negative incentive evaluated on a periodic basis. Those capped suppliers could consider their lower scores as demerits, bringing them down in the fourth ranked big box retailer's rating of preferred suppliers. The alternative to compliance? At best, loss of significant revenue. At worst? Possible bankruptcy.
In other news, a court case alleges General Motors encouraged its supplier to make poor financial decisions in a series of events that eventually led to Clark-Cutler-McDermott's bankruptcy.
Perhaps the reason for buyers' preference for incremental approaches over sudden demands (both of which may, in fact, eventually lead to bankruptcy) lies in diverging levels of trust after all, as the researchers suggest.
