Industrial Marketing Management 32 (2003) 677 – 693

Capturing value creation in business relationships: A customer perspective

*
Wolfgang Ulaga
Department of Marketing, Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46656, USA
Marketing Department, ESCP-EAP, 79 avenue de la Re´publique, 75543 Paris, Cedex 11, France
Received 1 April 2003; received in revised form 1 June 2003; accepted 2 June 2003

Abstract

Collaborative relationships in business markets are of growing importance to customers and suppliers alike. Customers need to decide
whether to invest in a new supplier relationship, to maintain and develop a valued relationship, or to divest from a low-value relationship.
Suppliers, in turn, face growing commoditization of products and seek to differentiate themselves through relationships. The measurement
of value creation in buyer – seller relationships is still in its infancy, and a sound understanding of how firms create and deliver value in
business relationships is needed. Emerging studies investigate relationship value based on dimensions derived from theory and lack a
managerial perspective. Therefore, the present research explored relationship value from a grounded theory perspective. In-depth
interviews with purchasing managers identified eight value drivers in manufacturer – supplier relationships. Implications for the
measurement of the concept are discussed, and directions for further research are suggested.
D 2003 Elsevier Inc. All rights reserved.

Keywords: Buyer – seller relationships; Customer value; Relationship value; Grounded theory

1. Introduction through improved customer interactions (Vandenbosch &

Dawar, 2002). As a consequence, suppliers also need to
There is a growing recognition that collaborative rela- understand how they can create and deliver value in
tionships in business markets offer significant opportunities business-to-business relationships.
for companies to create competitive advantages and The measurement of value creation in buyer – seller rela-
achieve superior results (Hewitt, Money, & Sharma, 2002; tionships is still in its infancy, and a sound understanding of
Jap, 1999; Lyons, Krachenberg, & Henke, 1990). In many the concept is a prerequisite for developing reliable and valid
business markets, manufacturers reduce the overall number assessment tools (Eggert & Ulaga, 2002; Ulaga, 2001).
of companies in their supply base and focus on closer Emerging studies investigate relationship value based on
relationships with key suppliers. Consequently, when dimensions derived from theory. However, a sound concep-
assessing their supplier portfolio, customers need to decide tualization grounded in managerial practice is missing. The
when to invest in a specific supplier relationship, when to present research attempts to close this gap by exploring
maintain and develop existing relationships, or when to relationship value from a grounded theory perspective. To
divest from underperforming relationships. work towards this goal, the rest of the paper is structured as
Many suppliers, in turn, face a growing trend towards follows: First, we position our research within the emerging
commoditization of products (Rangan & Bowman, 1992). In literature on relationship value. Next, we describe our research
search of beating the ‘‘commodity magnet,’’ they increas-ingly methodology. We conducted ten in-depth interviews with
turn toward new ways of differentiating themselves purchasing managers in nine manufacturing companies
located in the Midwest of the United States. Analysis and
interpretation of results identified eight value drivers in
* Department of Marketing, Mendoza College of Business, University supplier relationships. Finally, we discuss implications for
of Notre Dame, Notre Dame, IN 46656, USA. Tel.: +1-574-631-9997,
+33-1-49-23-21-21; fax: +1-574-631-5255, +33-1-49-23-22-48. measuring relationship value and provide directions for further
E-mail addresses: wulaga@nd.edu, wulaga@escp-eap.net (W. Ulaga). research.

0019-8501/$ – see front matter D 2003 Elsevier Inc. All rights reserved.
doi:10.1016/j.indmarman.2003.06.008
678 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693

2. Relationship value ship benefits and sacrifices. Elsewhere, Gro¨nroos (1997)

distinguishes between two benefit and two sacrifice dimen-
Exchange has been accepted as a core concept of the sions. ‘‘Customer-perceived value can be described as core
marketing discipline (Bagozzi, 1975; Hunt, 1991). In fact, solution plus additional services divided by price and
most current definitions of marketing explicitly include relationship costs or core plus/minus added value.’’ Accord-
exchange in their formulations (Kotler & Armstrong, ing to Tzokas and Saren (1999), the major contribution of this
2001). Market exchanges take place because all parties framework is to ‘‘bring into the picture the costs and benefits
involved expect to gain value in the exchange. Therefore, associated with the relationship itself as determi-nants of the
value has always been ‘‘the fundamental basis for all overall value perceived by the customer.’’
marketing activity’’ (Holbrook, 1994). More recently, Mo¨ller and To¨rro¨nen (2003) suggest to
While the marketing literature contains a variety of conceptualize value in a supplier – customer relationship
definitions stressing different aspects of the concept, four along three dimensions: the supplier’s efficiency function,
recurring characteristics can be identified: (1) Customer the effectiveness function, and the network function. The
value is a subjective concept (Kortge & Okonkwo, 1993); efficiency function refers to the efficacious use of
(2) it is conceptualized as a trade-off between benefits and resources in a business relationship. Effectiveness refers to
sacrifices (Zeithaml, 1988); (3) benefits and sacrifices can an actor’s ability to invent and produce solutions that
be multifaceted (Grisaffe & Kumar, 1998); and (4) value provide more value to customers than existing offers. The
perceptions are relative to competition (Gale, 1994). In network func-tion finally takes into account the potential of
short, customer value is generally defined as the trade-off value creation in the larger network beyond the dyadic
between the benefits (‘‘what you get’’) and the sacrifices supplier – customer relationship.
(‘‘what you give’’) in a market exchange (Zeithaml, 1988). Empirical research focusing on relationship value in
Most research on customer value adopts a transactional business markets from a customer perspective is limited to
approach focusing on product-related issues, neglecting a few studies. Based on data collected among providers of
relational dimensions of customer-perceived value (Dwyer information, communication, entertainment, and financial
& Tanner, 2002; Parasuraman & Grewal, 2000). In review- services, Lapierre (2000) identified 13 drivers of relation-
ing the value literature and its implications for relationship ship value and grouped them into three benefit dimensions
marketing, Payne and Holt (1999) state that ‘‘the most (product, service, and relationship benefits) as well as two
recent development has been to consider customer value sacrifice dimensions (price and relationship costs). Data
from the viewpoint of relationship marketing. This is collection in Lapierre’s study was restricted to business-to-
described as ‘relationship value’.’’ business services. Consequently, the findings of Lapierre’s
The conceptual roots of the relationship value construct study cannot be generalized to industrial buyer – seller
lie in business and services marketing. Anderson, Jain, and relationships. In addition, the conceptualization of relation-
Chintagunta (1993) define value in business markets as ship value in her study included a number of marketing
‘‘the perceived worth in monetary units of the set of variables, for example, trust and solidarity, which the
economic, technical, service, and social benefits received marketing literature typically considers as distinct con-
by a custom-er firm in exchange for the price paid for a structs. Such a conceptual overload may pose significant
product offering, taking into consideration the available problems of discriminant validity.
alternative suppliers’ offerings and prices.’’ Their definition Walter, Mu¨ller, Helfert, and Ritter (2003) surveyed 230
represents one of the first efforts to identify and categorize purchasing managers in German manufacturing companies.
the relational dimen-sions of the value construct, namely, The authors suggest four main dimensions of value crea-
social and service benefits. tion in a buyer – seller relationship labeled ‘cost function,’
Wilson and Jantrania (1995) examine the creation of ‘quality function,’ ‘volume function,’ and ‘safeguard func-
value in industrial buyer – supplier relationships. Based on tion.’ In addition, four indirect functions complement a
conceptual research, they develop a three-dimensional cat- supplier’s potential of value creation in a business rela-
egorization of relationship value: economic, strategic, and tionship: the ‘market function,’ the ‘scout function,’ the
behavioral value. Though they expect substantial ‘innovation development function,’ and the ‘social support’
difficulties in an empirical assessment of the overall value function.
proposition as perceived by customers in a business Table 1 summarizes the emerging body of research on
relationship, they conclude that relationship value ‘‘is a relationship value. A careful review of these conceptualiza-
problematic concept which cannot be ignored.’’ tions raises three important issues. First, although some
Ravald and Gro¨nroos (1996) develop a generally appli- common dimensions emerge, the proposed constituents of
cable framework of value perception in exchange relation- relationship value vary considerably among these defini-
ships. They point out that the trade-off between benefits and tions. Second, most dimensions are only described in very
sacrifices in long-term-oriented exchange processes is not broad terms and do not provide a clear understanding of
restricted to the single episode level. Rather, value assess- their underlying facets (i.e., ‘strategic benefits’ or ‘relation-
ments should take into account both episode and relation- ship costs’). Finally, no guidelines are provided as to how
 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693 679
Table 1

Conceptualizations of relationship value

Authors Benefit dimensions Sacrifice dimensions Comments
Anderson et al. (1993); economic benefits, technical benefits, price theory-based
Anderson and Narus service benefits, social benefits
(1995, 1999)
Wilson and Jantrania economic benefits, strategic benefits, none theory-based
(1995) behavioral benefits
Ravald and Gro¨nroos episode benefits, relationship benefits episode sacrifices, theory-based
(1996) relationship sacrifices
Gro¨nroos (1997) core solution, additional services price, relationship costs theory-based
Lapierre (2000) product-related benefits, service-related price, relationship-related survey of 209 and 129 purchasing
benefits, relationship-related benefits sacrifices managers in the Canadian IT
and finance sectors
Mo¨ller and To¨rro¨nen efficiency function, effectiveness theory-based
(2003) function, network function
Walter et al. (2003) direct functions: direct function survey of 230 purchasing managers
quality cost reduction in German manufacturing companies
volume
safeguard
indirect functions:
market function
scout function
innovation function
social support function

these dimensions could be combined to form an overall 3. Methodology

measure of relationship value.
When investigating relationship value, researchers may 3.1. Grounded theory
draw on the existing literature on vendor performance
evaluation in industrial marketing (Hutt & Speh, 2001), Researchers have recommended the use of qualitative
purchasing (Lehmann & O’Shaughnessy, 1982; Timmer-man, methods (1) to explore phenomena about which little is known
1986), and supply chain management (Monczka, Trent, & or (2) to gain novel understandings about existing phenomena
Handfield, 2002). For example, Hutt and Speh (2001) mention (Stern, 1980). In addition, qualitative approaches can be used
key criteria such as ‘quality,’ ‘service,’ and ‘price.’ Similarly, to obtain the intricate details about a specific phenomenon
Timmerman (1986) describes how multi-attribute models may under investigation (Strauss & Corbin, 1998). Among the
be used to monitor supplier perfor-mance. Supply Chain many types of qualitative re-search methodologies, grounded
Management texts also provide information on how to theory was first presented by Glaser and Strauss (1967) in an
evaluate supplier performance. For example, Monczka et al. attempt to bridge the gap between theoretically ‘‘uninformed’’
(2002) suggest two categories of measures when monitoring empirical research and empirically ‘‘uninformed’’ theory, by
supplier performance. Accord-ing to the authors, objective grounding theory in data (Charmaz, 1983; Goulding, 1998).
(quantitative) measures refer to three categories: delivery Strauss and Corbin (1998) define grounded theory
performance, quality performance, and supplier cost development as a process whereby theory is derived from
reduction. In turn, subjective (qualitative) measures include data, systematically gath-ered and analyzed through the
factors such as the supplier’s problem resolution ability, research process. Thus, grounded theory offers new insights
technical ability, progress reporting, cor-rective action and a better under-standing of phenomena by the researcher.
response, cost-reduction ideas, new-product support, and
buyer – seller compatibility. The present research was designed to investigate the
Based on these findings, the objective of our research is meaning of the construct’s various dimensions, especially
to address the three shortcomings of previous conceptuali- as research on this construct is still at an early stage. The
zations of relationship value and to explore the concept profound understanding of relationship value and its facets
from the perspective of how customers actually view value provides the foundations for developing sound measures of
creation in a supplier relationship. Consequently, we the concept.
suggest to ground the investigation of relationship value in
the language of relationship managers. This approach 3.2. Data collection and analyses
comple-ments our exiting knowledge and offers new
insights for a better understanding and measurement of the 3.2.1. Sampling procedure
construct. In line with this objective, we propose a Data were gathered through in-depth interviews with
qualitative methodol-ogy in this research. purchasing managers in manufacturing companies located
680 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693

in the Midwest of the United States. Companies were Respondents were further asked to describe in detail the
contacted through the local Chapter of the Institute of product, how it was used in the manufacturing process, its
Supply Management (ISM) and through the alumni net- relative importance in the final product, and the demand
work of a Midwestern University. Based on these two and supply context. The selected product had to be an
sources, 21 purchasing professionals were identified. The important component, unlike a commodity or a MRO
managers were contacted by telephone and invited to product, for which the customer maintained a collaborative
participate in the study. Ten managers agreed to partici- relationship with suppliers. Participants were asked to
pate, and interviews were scheduled over a period of three specify why they considered a particular relationship to be
months. collaborative, and indicators from the literature—such as
idiosyncratic investments or coordination efforts (Jap,
3.2.2. Unit of analysis 1999)—were used to ensure that all participants had a close
The unit of analysis for the present research was a specific manufacturer – supplier relationship for a key com-ponent
collaborative manufacturer – supplier relationship. As the in mind. The purpose of this initial stage was to ask the
present study aimed at identifying the variety of underlying respondent to consider a specific use situation and to
relationship value dimensions in business mar-kets, a sample prepare for a comparison of alternative buyer – supplier
of relationships from different manufacturing industries was relationships.
required. At the same time, key manufactur-ing characteristics The second part was designed to identify the different
of participating companies had to allow for comparability relationship value dimensions. Respondents were asked to
across the participating firms. Conse-quently, companies in describe how suppliers create value for their organizations,
batch-processing assembly industries were contacted (SIC and to illustrate the different directions of value creation
Codes 34 – 38). through examples from the specific supplier relationship
under consideration. To facilitate the process, participants
3.2.3. Informants were asked to describe activities between the supplier and
Participants were influential decision-makers involved the manufacturer, which then allowed the interviewer to
in selecting and monitoring the supplier relationship. The probe into the different benefits and costs perceived in the
selection of key informants involved in the manufacturer – relationship. Particular attention was given to the compar-
supplier relationship was critical in the process of identify- ison of each company’s main supplier and, where possi-ble,
ing and describing value-creating relationship dimensions. its second-best alternative supplier of the same product.
Consequently, only senior-level participants were invited to Finally, in the third part of the interview guide,
participate in the study. participants were invited to describe their company and
their own background. As the empirical study relied
3.2.4. Sample characteristics completely on the perceptions of key informants, it was
The final sample consisted of manufacturers in a variety important that respondents were competent to report on the
of areas, such as aircraft landing systems, amplifiers and different dimensions of relationship value. Variations in
microphones, audiovisual projection equipment, automo- respondents’ background, position, knowl-edge, and
biles, braking systems, electronic components, household perceptions of the relationship potentially influence their
appliances, orthopedic products, and vacuum pumps. Prod- competency and knowledge of the rela-tionship dimensions
ucts considered by participants also varied significantly. under investigation. Hence, the interview guide contained a
Customers purchased aluminum wheel forgings, car seats, final set of questions referring to the respondents’ position
electronic components, motors, pins, springs, and surgical and tenure with the company.
instruments.
The size of participating companies ranged from small-
and medium-sized manufacturers to multinationals, 3.2.6. Analysis and interpretation
employ-ing a workforce between 400 and 348,000. The Interviews lasted approximately 1.5 – 2 h. Each
selected buyer – supplier relationships had been in place interview was audiotaped and verbatim transcribed. When
between 2 and 25 years. possible, the interviews were supplemented by plant tours
The final sample consisted of ten participants from nine and docu-ments provided by participants. Analyses of the
manufacturing companies. The sampling process ceased verbatim interview transcripts followed traditional
when saturation was reached, indicated by information grounded theory guidelines (see, e.g., Flint, Woodruff, &
redundancy. Table 2 summarizes the main characteristics of Gardial, 2002). After the first few interviews, analyses
the sample used in the present study. were started early to allow for interpretations to inform and
direct subsequent interviews. Grounded theory coding was
3.2.5. Interview guide used, that is, open, axial, and selective coding, to identify
The interview guide was composed of three parts. In the the different relation-ship value drivers and their
first part, participants were asked to select a specific subdimensions (Strauss & Corbin, 1998).
product they purchased from at least two suppliers.
 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693 681
Table 2

Study sample
Participant name Company activity Company size Product purchased
Frank: Business Manager automobiles sales: $177 billion, interior for a specific vehicle;
e-procurement, 12 years in employees: 347,700 one system supplier, four potential
industry, 4 years in alternative suppliers
purchasing, 4 years in
e-business, age 35
Scott: Director Global household appliances sales: $11 billion, electric motors; two main suppliers,
Commodities, 6 years in employees: 59,408 multiple secondary suppliers
engineering, 7 years in
purchasing, age 38
Jeff: Senior Purchasing automotive brakes sales: $6.2 billion (division), pins; one major supplier (95%)
Supervisor, 13 years in employees: 21,750 (division)
purchasing, age 38
Jack: Director of Purchasing, aircraft landing systems sales: $9.7 billion (division), aluminum forgings for aircraft wheels;
25 years in production employees: 37,500 (division) one major supplier (90%), one alternative
control and purchasing, supplier (10%)
age 45, and Shawn:
Project Manager Global
Sourcing, 4 years in
purchasing, age 28
Richard: Director, Strategic orthopedic reconstructive sales: $1.2 billion, surgical instruments; two major supplier,
Sourcing, 18 years in implants employees: 3600 60 suppliers for product category overall
purchasing, age 40
John: Purchasing Manager, electric sensors sales: $458 million, circuit boards, one major supplier (80%),
16 years in purchasing, employees: 5313 one alternative supplier (20%)
3 years in production
planning and control, age 38
Jerry: Purchasing Manager, video-projection equipment sales: $110 million, springs; one sole supplier
9 years in purchasing, and audiovisual support products employees: 500
19 years in production
planning and inventory
control, age 50
Mary: Purchasing Manager, vacuum pumps sales: $82 million, electric motors; two main suppliers
25 years in purchasing, employees: 400
quality control, age 45
Denice: Contract Administrator amplifiers sales: $75 million, standard electronic components;
Supervisor, 22 years in employees: 450 one main supplier, several other suppliers
purchasing, age 42
All participants are key decision-makers in the purchasing departments of their firms. Names are pseudonyms.

3.2.7. Assessment of trustworthiness value drivers, feedback from study participants was gathered
The trustworthiness of the present research findings was in a third step (Denzin, 1978) and adjustments were made.
assessed by applying the techniques of triangulation, infor- Finally, the study’s methodology and findings were
mant feedback, and replication recommended by Miles and presented during a workshop with 27 purchasing managers
Huberman (1994). of the local Chapter of the ISM. Participants received a
In a first step, the verbatim interviews were content- description of the value dimensions and were asked to
analyzed by two additional researchers who had not previ- comment on how well they reflected their practice and
ously participated in the interviews. The researchers inde- whether they recommended changes. Only a few changes
pendently developed their relationship value drivers and in wording and illustrations of value drivers were made
subdimensions using the same material and procedures as after this final step.
the main researcher.
In a second step, results of all three researchers were
compared to identify those areas where they disagreed. All 4. Results
three researchers consistently identified the eight generic
value drivers. However, differences existed in terms of (1) Eight dimensions of value creation in manufacturer –
the labeling of each dimension and (2) the attribution of supplier relationships emerged from our interviews with
subdimensions to value drivers. purchasing managers (Fig. 1). In this section, the relation-
To resolve the abovementioned problems of labeling and ship value drivers and their dimensions are discussed in
correct assignment of subdimensions to each of the eight detail.
682 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693

Fig. 1. Relationship value drivers.

4.1. Relationship value Dimension #1: product quality The participants also mention the importance of deliver-
ing consistent quality levels over time. In the example of a
Above and beyond all other aspects, manufacturers spring supplier, Jerry recently switched suppliers because
maintain relationships with suppliers to source products the previous supplier delivered inconsistent quality. He
and services needed in their transformation process (Hom- found significant variations in the characteristics of springs
burg & Rudolph, 2001). The participants in our study received. The supplier was unable to solve the problem and
consistently report that it has become increasingly diffi-cult had to be replaced by an alternative springs manufacturer.
for suppliers to differentiate themselves from com-petition
merely on the basis of product quality. Quality is a given, Jerry: We switched supplier of springs last year. With the
and suppliers must meet quality standards to be included in previous supplier, we were having too much variations.
the supply base. In most cases, quality or engineering When we went back to the supplier to ask him to help us
departments are asked by purchasing to preselect suppliers, improve the situation, we found out, through interview-
which are then added to a pool of ‘qualified suppliers.’ ing and his answers to us, that he didn’t have the
technical capabilities to help us.
The companies mainly search for technical performance Several participants in our study underline the pressure for
and reliability when referring to product quality. The sup- a continuous improvement of quality levels. Being at the
plier’s products are expected to meet a set of technical ‘cutting edge’ of product quality is especially mentioned in
specifications within certain tolerance levels: our interviews in the automotive and household appliances
industries. The following passage illustrates this issue:
John: For a circuit board, we look for a specific output.
We want to make sure there are no cracks in the hybrids. Scott: One of the key elements of a supplier relationship
None of the parts must be skewed on the circuit board. is having the best-in-class quality for the components
The part has to be dimensionally and electrically correct that they supply and understanding the system that the
per a set of specifications. We gave the supplier a component goes into so that they know the implications
drawing that outlines the physical dimensions, the of their product in the functionality of our product. We
distances between the pads, where the capacitors are expect suppliers to work with us and try to continuously
supposed to be, where the traces are. And then there are drive quality. As you see more European and Asian
the electrical specifications the supplier has to meet, that products come into our country, the bar gets raised all
is, the output this circuit board has to produce. the time, and you have to benchmark yourself against
different competitors than those you had in the past.
 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693 683

Most of the companies in our study have implemented study mention a number of additional services. Suppliers
incoming inspections for product quality using quantitative need to provide the right information at the right time. This
measures, such as the number of shipments rejected, as value driver of customer information has several facets.
opposed to the total number of shipments received or ‘Parts First, manufacturers expect to get a hold of suppliers
per Million’ (PPM) to periodically review suppliers’ whenever needed (supplier availability). Richard, director
product quality. Some even have implemented supplier of strategic sourcing for a medical equipment
certification programs, thus abandoning incoming manufacturer, illustrates this value driver:
inspections at their facilities.
When quality problems occur, several participants men- Richard: Their presence brings value to us. They either
tion that their organization will work with the supplier to have to be here, or we need to be able to get a hold of
improve product quality levels through ‘Supplier Develop- them. If changes need to be made, their quick response
ment Programs’ composed of members from both the is paramount. When we design instruments, we will take
supplier’s and customer’s organization. several prototypes and go out to do cadaver studies with
a few doctors to critique the instruments. If we need
Jeff: Actually, we set an internal standard, like a PPM major design changes, they have to be able to stop,
level (Parts per Million), at the beginning of the year. regroup, and respond with those design changes.
We work with every supplier that doesn’t hit the target
through our ‘Approved Supplier Development Pro- In addition to supplier availability, our participants
grams’. We go in and find out what problems they have. voice their need to receive appropriate information
In some instances, our ‘Supplier Quality Group’ actually (information appropriateness). When changes occur,
helps them to develop test procedures, to find the latest suppliers are expected to follow through in a timely
technology, to help them fix issues on the line. Quality is manner. Speed of information may represent a competitive
a major component, but we do help them out in advantage, as illustrated in the following passage:
identifying where they can improve.
Jeff: We get requests for changes from our customers all
Recurring quality problems over time strain the relation- the time. Sometimes we need to get back to them within
ship and ultimately may result in discontinuing the a few days. It’s almost like a ‘love – hate’ relationship
relation-ship, especially if the supplier is unable to solve with our customers. There are not many carmakers out
quality issues. The following passage from Jack’s interview
there. You need their business. It is kind of hard to not
illus-trates this point:
be hard on our supply base. As much as we are getting
Jack: Most of [our suppliers] are all delivering a quality pushed, we need to push them, and it just trickles down.
product. If suppliers are not delivering a quality product, It is a domino effect. (. . .) Details are important. If we
we get rid of them. In fact, we had a supplier from get a request for a quote from Ford, and our supplier just
Mexico, and we tried to work with them on quality gives us a number on a paper, it doesn’t help us out.
problems for a long time. But then, we recently made a Details are important, because Chrysler and Ford always
decision they were never going to be up to our quality break everything down.
standards—at least not in the near terms. So we decided
to take them off the list and go somewhere else. A third component within this dimension is the possibil-
ity of outsourcing tasks to suppliers such as assembly,
design work, and product testing. Assembly is an area of
Based on these findings, we identify product quality as a
major concern to manufacturers. The purchasing professio-
key driver of relationship value. In line with previous
nals we interviewed mention three main vectors of value
research (Crosby, 1979; Juran, 1974; Ulaga & Chacour,
creation in outsourcing assembly tasks to suppliers
2001), we define product quality as the extent to which the
illustrat-ed in the following passages from the interview
supplier’s product meets the customer’s specifications. Key
with a major car manufacturer.
aspects of product quality are performance, reliability, and
consistency over time. Typical measures across industries First, suppliers create value for their customers through
are ‘Returns’ or PPM. consolidating the supply base. By delivering integrated
systems as opposed to single parts, suppliers reduce the
number of outside companies that the customer needs to
4.2. Relationship value Dimension #2: service support
coordinate.

In many business markets, suppliers provide a blend of Frank: Consolidation in the supply base is one way in
tangible products and a range of accompanying service which the suppliers are creating value. For the [car
elements (Hutt & Speh, 2001; Levitt, 1981). These service model], we looked at suppliers that could provide an
components play an important role in differentiating a entire interior, so this meant that they would be
supplier’s offering (Anderson & Narus, 1995). supplying the instrument panel, the floor consol, the
Beyond product-related services, such as product war- overhead system, the door panels, the side wall trim,
ranty and availability of spare parts, the participants in our garnish, the rear shelf and even the carpeting.
684 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693

Second, synchronizing both the supplier’s and the cus- not meeting their schedules in a timely fashion, that
tomer’s production schedules allows to deliver parts in a causes a big hiccup and may result in premium freight to
sequenced manner and to reduce inventories. get parts here, and the supplier would have to pay for it
if they were at fault. It also causes problems for us
Frank: We try to make our assembly plants as lean as
because we need to call and make sure that we have
possible. We try to reduce the amount of inventory in the
parts there. We may have to send somebody to help the
plants and the time it takes to make vehicles. So one of the
supplier. There are additional costs on us if we have
things we do is to sequence parts. We ask suppliers to ship
suppliers who are not meeting their schedules. (. . .)
parts in a certain order as to how we are going to assemble
Basically, delivering the right part at the right time in the
our cars. We shift some of our space require-ments to the
plants, and in the after market as well, are our main
supplier. They need to be able to schedule how they are
requirements.
going to manufacture their products, so they have enough
parts and put them in the right order. And when we need If delivery requirements change, manufacturers expect
them, they will pull them out and put them in the right their supplier to adjust to these modifications (delivery
order to send to our plant. There are additional labor, space flexibility). Such changes in delivery schedules may occur
and scheduling requirements on the part of the supplier. due to spikes in demand or changes in the mix of products
This means substantial savings because the assembly line delivered. The supplier’s responsiveness when emergency
worker only needs to go to the next spot and pick up the deliveries are needed is highly valued by manufacturers.
part. This could be for colors, but also for other parts, say
Jack: You will notice the supplier that are your best friends
air conditioning systems. You have less modules to chose
and are customer-focused. When you are down because
from, less chance to make a mistake too by the worker on
someone didn’t count the parts right or there was a mistake
the assembly line.
in the inventory, you call them up and say ‘We are shut
Finally, outsourcing subassembly tasks to the supplier down, we need these parts tomorrow, how soon can you get
represents a third benefit for manufacturers, liberating plant it to us?’ A lot of supplier will turn their shop around for
space that can be allocated to other activities. you. And they will drive parts in here from Ohio or
Chicago. So they can keep us running. Those are the things
Frank: In many cases suppliers take on some of the that really stick in your mind. Suppliers that go above and
subassembly operations. Their facilities are close to our beyond what a typical supplier will do.
assembly plants which leads to large reductions in plant
space. So we can either build more vehicles, have more Flexible adjustments are particularly important as man-
lines, or reduce the time that it take to build a vehicle. ufacturers increasingly shorten delivery cycles through
just-in-time delivery. As a consequence, suppliers are
Consequently, service support can be regarded as a expected to keep safety stocks or locate warehouses close
second key dimension of relationship value. In addition to to the customer’s facilities.
providing product-related services, suppliers create value
Finally, participants mentioned accuracy of delivery.
in two main service support areas: customer information
Delivering the right parts, that is, minimizing missing or
and outsourcing of activities.
wrong parts in shipments saves time and effort for the
customer.
4.3. Relationship value Dimension #3: delivery performance
In summary, delivery is a third relationship value driver
in business-to-business relationships. Suppliers create
The purchasing managers in our study identified ‘deliv-ery
value in this area by consistently meeting delivery
performance’ as a third dimension of relationship value. This
schedules (on-time delivery), their capability to adjust to
is consistent with the business marketing literature, which changes in delivery schedules (flexibility), and their
describes delivery as a major criterion in supplier evaluation capacity to con-sistently deliver the right parts (accuracy).
(Hutt & Speh, 2001). In all but two interviews, ‘quality,’
‘service,’ and ‘delivery’ were mentioned on top-of-mind as
4.4. Relationship value Dimension #4: supplier know-how
important value drivers in a manufacturer – supplier
relationship. But what exactly do manufacturers value when
considering a supplier’s delivery performance? In many industries, manufacturers turn to suppliers to help
them achieve a stronger competitive position (Ganesan, 1994),
Not meeting delivery schedules results in significant and recent research suggests that manufacturer – supplier
coordination problems for customers, and, ultimately, in relationships represent a strategic resource to gain competitive
additional costs for premium freight charges. Frank, head
advantages (Hogan & Armstrong, 2001; Jap, 1999; Wernerfelt,
of e-procurement, describes the consequences of late deliv-
1984). What are the critical resources customers seek to access
eries in the car industry.
in a supplier relationship? Kalwani and Narayandas (1995)
Frank: Another issue is on-time delivery of parts. We try state that manufacturers search to gain access to the supplier’s
to streamline how much inventory we have in the plants resources, skills, and strength in long-term manufacturer –
and in transit as much as possible. If the suppliers are supplier relationships.
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Suppliers may hold a specific technical expertise, which because they know what their capabilities are, and they
the customer may not have in-house or may not want to share that with our engineers.
acquire. Therefore, manufacturers may benefit from their Several participants mention a strong trend towards
suppliers’ know-how in multiple ways. First, suppliers shifting more and more product development tasks onto
continuously screen available supply sources for their cus- suppliers. Instead of communicating drawings and specifi-
tomers and present them with alternative new solutions cations to suppliers for execution, they now ask them to
based on their in-depth knowledge of the supply market bring in complete design solutions and take on project
and its evolution. management. This trend has opened up a whole set of new
opportunities for suppliers to add value based on their
Denice: (This supplier) comes to our facility at least
design and testing expertise.
once a week and works very extensively with our design
engineers. So if they have an application for a semi- Scott: Our suppliers have full-time engineers in our tech
conductor, they give him the performance specifications centers. They do the design, the drawings, the project
and let him come back with one or two solutions. This management work for certain commodities. It’s a black-
reduces the investment we have to make in terms of box design. They supply us with a whole solution. It’s
knowledge and experience of individual components. the same with testing. We certify the labs of our
The semi-conductor market is changing every single suppliers. So they can bring us solutions instead of
day, and to keep abreast of all new products in the ideas. We don’t have to do the testing again to verify
market would be very expensive for us to do. So we rely their results. So, you minimize the amount of duplicate
very heavily on this supplier to bring us those products testing that goes on.
and give us awareness. It also means that we can have
In summary, supplier know-how represents a fourth
younger people on the engineering staff. They don’t
dimension of relationship value. Suppliers may hold a
have the same background.
specific expertise, which is not available within the
Past experience with a customer’s products and a thor- custom-er’s organization. This dimension encompasses
ough understanding of the manufacturer’s operations create several aspects. First, the supplier’s extant knowledge of
an opportunity for a supplier to add value in the improve- the supply market provides an opportunity to present the
ment of existing products. Our interview with Shawn customer with new sourcing alternatives. Second, a
illustrates this point: supplier adds value in assisting the manufacturer in the
improvement of existing products—both in terms of
Shawn: Suppliers that have a lot of experience with your functionality and costs. Finally, a supplier may assist the
products know how to make parts efficiently and customer in developing new products.
effectively. A supplier that has done a specific part for
years can turn around and make a change at a third of 4.5. Relationship value Dimension #5: time-to-market
the cost of a new supplier. Their lead-time is usually less
also because they can do the set-up in the dark. And they
Over the past decades, competitive advantage in manu-
make suggestions. I had a supplier call me and say ‘This
facturing industries has shifted from low labor costs and
part is exactly like that part, exactly the same fit, form economies of scale to flexible manufacturing (Stalk, 1988).
and function, except that one has an additional process Today, speed and time-to-market have become strategic
on it. Do you want to make an engineering change on guidelines in designing and managing supply chains (Stalk
it?’ The expertise in a relationship is amazing in terms of
the value it creates. The experience and knowledge & Hout, 1990). Dell’s direct business model illustrates best
this trend toward shorter cycle times. The company carries
really protect them from global competition. I have
inventories of only 11 days on average and delivers its PCs
looked at suppliers in Asia and Mexico, and can’t find
built-to-order within 5 – 6 days of lead-time (Magretta,
anyone who can make it for anything close to the price.
1998). Suppliers are treated as in-house partners. Inventory
Valued suppliers are involved early on in new product levels and replenishment needs are shared in real time.
development. They are brought in as experts to suggest When new products are launched, suppliers station their
solutions and to take cost out of the product right up front. engineers in Dell’s plants to fix design flaws in real time.
Our interviews confirm the growing importance of time-
Jack: We try to get the supplier in here up front. They are to-market. Participants voice an increasing pressure on
the experts on stamping and forging. Our engineers know manufacturers to develop products at a faster pace. New
what they want as far as design is concerned. But if you can
products represent a growing portion of a company’s
revenue base. The following passage from household appli-
get the forgers or stampers here, have them sit down with
ances illustrates this trend:
the engineers, and get the design right the first time, look
how much farther you are in the process of development. Scott: I think what has changed in the US appliance
We call it early supplier involvement. The suppliers can market in the last three years is that there are more new
take costs out of the product right up front products coming, while changes and product differ-
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entiation are very minor. Being able to make changes In summary, our study confirms that a supplier’s ability
quickly was always important, but it wasn’t as important in to reduce time-to-market represents a source of value
the past. Now we introduce more new products than we creation in buyer – supplier relationships. Suppliers add
ever have before. All of a sudden, those new products have value through accelerating design work, developing proto-
a significant impact on your revenue base. Being able to do types faster than competitors, and speeding up the product
that quickly is a much bigger deal than before. It has testing and validation process.
always been a factor, but it is more important now.
4.6. Relationship value Dimension #6: personal interaction
As a consequence, companies devote significant efforts
to decrease cycle times. For example, several years ago, it
took U.S. car manufacturers 36 – 40 months from the start Though business relationships are established between
of the design of a new model to getting the first vehicle off organizations, they are actually managed by individuals. In
the assembly line. Today, automobile companies have com- fact, ‘‘people make a relationship work or fail’’ (Wilson &
pressed cycle times to less than 18 months. Jantrania, 1995). Personal relationships are part of the
relational exchange, and buyers consider personal relation-
Frank: We build vehicles from the start of design to first ships as one important aspect of purchasing (Dwyer, 1993;
product off the line in as low as 18 months, where three Dwyer, Schurr, & Oh, 1987; Dwyer & Tanner, 2002).
years ago, it took us close to 36 – 40 months to do that.
We are really trying to get cars to market much faster. The participants in our study differ in the way they view
We are still not a leader in that area, but we try to make benefits accruing from personal interaction in a supplier
up as much time as possible. relationship. On the one hand, certain purchasing managers
hold the development of relationships at an individual level
Manufacturers turn to their suppliers in different areas to in high regard and devote resources to building a rapport
reduce overall cycle times. Speed of executing design work with suppliers. Jeff’s interview illustrates this stance:
for a customer is one area where supplier can add value:
Jeff: Every year we bring suppliers to a football game.
Frank: Our global suppliers can get much faster turn- We focus on those suppliers who save us money, have
around in completing or changing designs. They take in good quality, and we just like overall. It develops the
a requirement and send it to an off-shore facility where social relationship and gives us an opportunity to talk
they have much more of the day to work with it. If we off-line about things that are not necessarily about work.
decide at 3:00 p.m. to do something, they can send it to a It allows us to get to know these people better. I
new facility, and by the time you come back the next
specifically hold the social relationship in high regard as
morning you already get a result.
one of the important factors. Do you really want to call
Speed also refers to developing prototypes faster. By somebody who is going to yell at you or who has one-
developing a prototype right to the customer’s specifica- word answers and never returns phone calls? I have such
tions the first time, a supplier may improve cycle time a good relationship with this supplier that we don’t beat
significantly. around the bush. I just tell them the way it is, they
Richard: You have to have instrument suppliers that are understand, and they fix it. That is really something
quick at what they do. For example, last week, we good to have. It is valuable.
delivered two models to an instrument supplier, and they The development of interpersonal ties leads to a number
turned around prototypes within four days. That is an of benefits. Communication between both parties is en-
extreme, but typically what we are looking for are lead- hanced. If problems occur, they are more easily addressed.
times of four to six weeks. Two years ago it would have Each partner’s objectives in the relationship are better
been twelve to sixteen weeks. understood, which provide both parties with an opportunity
In addition, suppliers take on more and more testing and to expand the relationship as a whole.
validation tasks, and they perform these tasks faster than Jeff: When I first came to [company], the person who I
the manufacturer. There is no need for retesting once the took the position over was not well liked by the supplier.
manufacturer receives the product.
They voiced their opinion as such. I changed the way we
Frank: Suppliers add value through testing and valida- work with them. When dealing with these people I look at
tion. We have all kinds of validation requirements for them as more than just a tool. I look at them as a person. To
our parts whether it is bumper impact tests or sled tests me it is very important. If you don’t have that I don’t think
for the interior airbags. Suppliers take over more and you can function well in the industry. I think it [the
more of our validation, and they are able to do it a lot relationship] grew more after I came on board, because of
faster. That helps us to improve our cycle times. Some the relationship that I developed with them. I think they
of our validation equipment is used 24 hours, 7 days a opened up and understood what they need to do to move
week. By going to supplier facilities, we speed up the the relationship ahead. I’m not so sure they saw us as a
validation process and get cost savings faster. This is not long-standing customer before. Our relation-ship
only for new parts but also for cost improvements. changed that, and I see this supplier developing.
 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693 687

When comparing the working relationship with two Engineering says ‘Well, [the supplier] gave us some
suppliers of electrical motors, Mary mentions that one nuts, and we qualified the program on it. You have to go
company is much easier to work with than the other. This to them.’ If they know that they are the only one on
considerably slows down the information process. there, then we get screwed in the long run because their
Mary: One company is much easier, much simpler, to do prices are going to be out of this world. I try to build a
business with than the other—just because they give us better relationship. It hasn’t been good for me because I
their names and e-mail addresses. The quality people have been burnt too many times with those guys, and
know the quality managers, they can call them up and they don’t seem to be changing their ways.
talk to them. All of those lines are very open. The other A second set of participants expresses an opposite view
company, well, you have to do all of those things of how social interactions influence a manufacturer –
through the salesperson. It is much more difficult to get suppli-er relationship. These purchasing managers refer to
the answers, because now my quality person is calling the manufacturers’ internal policies and rules of conduct
me asking a detailed question. And now I have to call with respect to handling gratuities.
the salesperson and give him a detailed question. And he
goes and talks to his people who ask a question that Richard: As a buyer, you really have to be careful of
neither one of us know an answer to. This is very how you are perceived within the department and the
important to those of us who have to deal with a supplier organization. If you are walking out of the front door
on a day-to-day basis. every day to the supplier’s car to get lunch that is an
issue. We don’t mind the occasional. But for the most
Personal interactions should be developed at all levels part we have a very low tolerance level for it. The
of the organizations, from the sales representative to the individuals that work for us and for the suppliers are
supplier’s president. well-paid individuals. We don’t need to take advantage
Richard: One of the things that are of value is that you of the other stuff.
have the presidents of these companies show their face
here. We like the comfort of having the president here Beyond ethical considerations in how to handle personal
and knowing what is going on. I think that shows that interactions in a manufacturer – supplier relationship, some
you can call them. I can call the president of a company participants suggest that their organizations have imple-
and get him to shake the stick over there. It’s the name, mented procedures limiting the role played by
the face: ‘You can count on me if you need to use the interpersonal relationships.
silver bullet to get something done’. I think that is very Frank: From my experience, it doesn’t make a whole lot
important. It’s a comfort level. of difference who is on the other side. I think [our Vice-
The absence of good personal interaction may endanger President of Purchasing] doesn’t want decisions to be
the overall relationship. Not having a good working rela- made because of how you feel about certain individuals
tionship is considered counterproductive: or suppliers. When he came on board 9 or 10 years ago,
his big thing was to bring the sourcing decisions to a
Denice: I think the personal issues are important, at least
central table where everyone has a chance to see what is
for our company, because there is such a close interaction
going on. That took away a lot of power from buyers
between their folks and ours. If you have people that for
who were in their own region or division making their
one reason or another do not get along, it strains the
relationship and is counterproductive. So, I believe that the
sourcing decisions based on who they knew. The central
value of the interpersonal skills is quite high. sourcing took a lot of that social element out of the
equation. All of a sudden, we started comparing notes on
Jack describes a situation of conflict in a supplier the suppliers, and that started the development of global
relationship. The supplier’s salesperson avoids contacting quality data that we have on suppliers. (. . .) This is also
purchasing wherever possible, and often directly interacts the reason why we support electronic bidding. In the
with the customer’s engineers to get them to specify the process, we will send out quotes, and the bids come
supplier’s product on blueprints. As a consequence, pur- back in. Typically, we will do a technical review with
chasing continuously searches for alternatives to replace the supplier, and we will have our quality engineer there
the supplier. to make sure they fully understand all the performance
Jack: This supplier has a good quality product, but when requirements of the quote. Once we feel that the
you look at the purchasing side, delivery and their pricing, . supplier’s proposal is good from a technical standpoint,
. . [shakes his head]. When the salesman comes in here I we start bidding with them. In some cases, there is some
don’t want to spend time with him, because he just gives leeway for the buyers to push a sourcing decision into
me a ‘song and dance,’ and I usually end up getting into an one direction if they have a good relationship with a
argument with him. So when he comes in, he doesn’t see supplier and know the supplier will do a good job. But
me, he just goes up to engineering and gets his part on the from our standpoint, we are not getting the best result if
blueprint, so that we have to buy it. we are steering.
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In summary, the responses from the participants reflect a to ask for higher prices than competition. Only one of our
strong diversity of opinions held about the potential of interviews illustrates such a perspective:
value creation through personal interaction. For those Richard: If you look at the overall price for the kit
participants who view personal relationships as a value [orthopedic implant and surgical instruments], the
driver, we can identify improved communication, more instru-ments are not the key cost factor. For a new
effective and effi-cient problem resolution, and a better product, we need to meet the market launch and rely on
understanding of each partner’s goals in the relationship as the supplier to deliver the product. Over time, as
most important bene-fits. These benefits contribute to volumes go down, it wouldn’t be economical to stay
growing the relationship as a whole. with more expensive suppliers. There are smaller
companies that will take on those instruments for a
4.7. Relationship value Dimension #7: price cheaper price. When you look at moving very complex
instruments from one supplier to another for the sake of
In their research on customer firm costs in buyer – saving a few dollars, there really have to be significant
supplier relationships, Cannon and Homburg (2001) men- savings to outweigh the potential pitfalls of a product
tion direct product costs, that is, the actual price charged by not meeting specifications or failing in the field.
the supplier for the main product sold, as the sacrifice most
easily identified by purchasing managers. When further probing into how managers view direct
product costs, we found that the majority of participating
The participants in our study confirm the role of direct companies faces a strong pressure to reduce costs.
product costs as an important aspect in evaluating rela-
tionship costs. Respondents state different reference points Jack: We have tremendous pressure to drive down costs,
when judging price levels. Three purchasing managers and we are just getting hammered year after year for
expect their suppliers to align themselves with the lowest price reductions. Our goal is to get 4 – 6% productivity
possible price in the market. Four participants benchmark every year out of the contract. We have been driving
suppliers against competition, to obtain ‘a fair market prices down year over year with these suppliers. The
price’ or an ‘average market price.’ Finally, two partic- train is coming to a slow down. You can’t get a whole
ipants expect their suppliers to charge a ‘reasonable price.’ lot more productivity out of them. It hurts me because I
have a deep relationship with these suppliers. Many
have helped us run programs over many years, and now
Lowest price—Frank: We found in electronic bidding suppliers say ‘This is it. We have to give you a price
that suppliers will keep going until they are totally increase. Raw materials are going up because of the
exhausted. If a supplier submits any new quote within embargo that is going on with imported steel.’ So once
the last 3 minutes of an auction, there is an additional 3 they do that, I have to say ‘Ok, what can we do down in
minutes added to it. So as long as somebody continues Mexico?’
to submit a bid, the auction will keep going. If in the last
three minutes nobody is bidding at all, then you know In response to continuous price pressures, suppliers are
you have gotten to the bottom. expected to commit to annual price reductions within long-
term contracts. They need to continuously identify new
Market price—Denice: We make certain that we have ways to decrease costs and to pass savings on to the
market pricing, that is, what we pay is reasonable in customers. The following passages from Scott’s interview
terms of what the market can bring to us. If our supplier illustrates this customer expectation:
is not best-in-class in terms of pricing, we negotiate with
them to get closer to the market price. Scott: The prices for appliances continuously go down.
It is a very cost sensitive, aggressive business. Our best
Reasonable price—Jerry: We don’t want any supplier partners understand that. They don’t fight it. Their
that loses money but we want them to be tough too. We business is designed around it, working with us to take
want them to give us the best cost as they can at the cost out of their business and our business. So they are
margin they can live with. They need to make money as very aggressive when it comes to doing cost reduction
well as we do. projects. And that is an absolute requirement to be a
good supplier with our company.
When asked, only two of the nine participating compa-nies
agreed that they accept a supplier’s higher price in exchange The manufacturers typically ask for price concessions
for additional benefits received in a valued rela-tionship. At between 4% and 8% annually. In turn, they are prepared to
first, this low number may appear counterintu-itive. The increase purchasing volumes with suppliers.
customer value literature suggests that a customer should be Denice: We pull similar components together and then
willing to pay a higher price for a higher-quality product submit that entire package out to 4 or 5 suppliers. It
(Zeithaml, 1988). Similarly, it could be argued that a gives them the opportunity to not just look at an
supplier’s investment in a close collaborative business
individual part but at a piece of our overall spend, and
relationship should provide the supplier with an opportunity
that increases the amount of business they can have
with us. This in turn
 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693 689

reduces the cost for us. I guess it to be about an 8% force them to come back to the negotiating table. We
reduction a year. And we have done that now three years need to keep the pressure on them. If they know that
in a row. Overall, in the three years, we have reduced they are the only game in town, we will get a price
material costs by about 25%. increase every year.
A collaborative relationship may protect a supplier from In summary, our interviews confirm that manufacturers
competition. If the company is at a price disadvantage, the focus above all on direct product costs. A supplier’s
manufacturer may work with the supplier to reach a price products may be priced below, above, or at competition.
that is considered to be competitive. Some participants expect a reasonable price or a ‘market
average.’ All manufacturers expect their suppliers to
Scott: When you talk about costs in a relationship, there commit to annual price decreases. They assist suppliers in
are things that you probably do with a partner that you driving down prices through joint cost reduction programs.
may not do with a non-strategic supplier. If your How-ever, switching costs may significantly slow down
supplier is at a competitive price disadvantage for a the manufacturer’s ability to gain price savings over time.
motor, you may give him time to recover, time to get to
a competitive price as part of your partnership. Instead
4.8. Relationship value Dimension #8: process costs
of forcing them to make a change today, you work with
them to get there over time. With a non-strategic
supplier you may kick them out of the supply base and Researchers have argued that firms collaborate in rela-
bring on a new supplier. There is an opportunity cost tionships to achieve improvements in overall operations,
associated with the relationship. not just in price reductions. For example, Cannon and
Homburg (2001) mention acquisition costs, that is, costs
Finally, switching costs represent an important factor customers incur in acquiring and storing products, and
when evaluating a supplier’s direct product costs. The operations costs, that is, costs inherent in the customer
following passages from our interview in the aircraft indus- firm’s primary business.
try illustrate the importance of barriers to entry:
Our participants mention several directions of value
Shawn: You can’t change to another supplier because of creation through cost reductions. In the category of acqui-
the tooling. We invest up front, and it is up to them to sition costs, they discuss transportation costs, inventory
maintain those dyes and re-sink them. They pay for that. management costs, order-handling costs, and costs related
That’s why they say ‘You have exclusive use of the to incoming inspections.
dyes, but you can’t pull the dyes out and take them to Transportation costs. One company mentions transpor-
somebody else.’ (. . .) Then, there is another barrier. You tation costs as a differentiator among suppliers. However,
can have tooling made somewhere else, and it would most respondents request that suppliers take on logistics
cost about 50,000 dollars. But the biggest barrier is that costs and quote prices Free on Board (FOB), with little
it would cost us well over a million dollars for a re- leeway for differentiation.
qualification of a new supplier. Once you are in, you are Inventory management represents an second opportunity
in for life unless you screw up big time. If you want to for cost reductions. Financial benefits accruing from
change forgings suppliers you have to go back and get having the supplier manage the customer’s inventories are
our customer’s approval. The customer would say ‘Well, reduced inventories, less working capital needed by the
ok, but you need to run me qualification tests.’ So it is a manufactur-er, and improved cash flow. One company
big cost associated with making a change like that. mentions its stocking relationship with a supplier:
Certain suppliers take advantage of such a situation. They Denice: They rent space in our facilities and bring the
are aware that customers would endure significant switching stock of the products into that area. Rather than shipping
costs if they wanted to change to another supplier. These to us, they deliver the product to our production floor
companies also take advantage of emergency deliv-eries to ask upon demand. There are obviously some very big
for considerable price premiums. As a response, the company financial advantages to having a stocking relationship.
continuously searches for alternatives. We have reduced our inventory, which increases our
working capital. And in terms of cash flow that’s a big
Jack: We have suppliers that we ask to work on a weekend,
advantage.
and they won’t come in with any premium. They will say
‘You guys are good customers, we will support you.’ It is a Order-handling further contributes to reducing relation-
unique situation. But guys like [supplier] will take ship costs. Customers need to allocate less time and
advantage of it: ‘Oh, you want us to work this weekend? dedicate fewer personnel to the ordering process. One
That is another $10,000’ (. . .) We try to get another company mentions that it heavily relies on the supplier for
supplier on board to take this supplier’s place. It will take a order-handling given the limited number of buyers in the
while to do it because we need a lot of testing. But we pur-chasing department:
know there are other suppliers that can be very competitive Jerry: Our organization is very flat. We can’t spend a lot
with [supplier] pricing. That will of time doing the buying from this supplier and
690 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693

everything else too that goes along with it. This supplier illustration, one company mentions that its accounting
has been servicing us for about 30 years. He comes in department tried to implement such a tracking system for
here once a week, takes an inventory of his products and several years. However, the project was finally abandoned,
then drops the order off to the buyer. The buyer reviews as it was considered too complex.
it to make sure it is in the levels that we established and
Mary: We focus on purchasing prices for parts. They’re all
places the order. The supplier handles the orders for us,
quoted ‘delivered to our factory’ so the whole logistics
within the parameters that we have set for him. He saves
costs are easy to consider in the price. We don’t have a
us tons of time. It’s a great asset because my buyer
good way of then saying ‘It costs us this much more to
doesn’t have to spend that time reviewing reports or
inspect it, this much more for order handling.’ We don’t
going out on the floor to see what’s what. Saves us a lot
have any cost matrix. We aren’t tracking it. We have played
of time.
around, trying to use our supplier rating program to capture
Several manufacturers have implemented automatic re- some of that. Basically we wanted to say ‘If they have very
plenishment programs or KANBAN systems to standardize poor quality here, then there is a cost to us there.’ But how
order processes. do we take that supplier rating, which we know is poor, and
Incoming inspections. A fourth vector of reduced acqui- put a dollar value on it and then add it to the cost of
sition costs are incoming inspections. Several product? It’s too complicated.
manufacturers indicate that they have abandoned incoming
inspections as their suppliers fulfil high quality standard for In summary, suppliers find multiple ways of adding
incoming products: value by taking costs out of a business relationship. Major
areas for reductions in acquisition cost are inventory costs,
John: We track quality each month through our ‘No- order-handling costs, and costs for incoming inspections.
Incoming-Verification’ (NIV) program. If a supplier’s Among operation costs are downtime costs, costs for
product meets our quality criteria so many months, we tooling, warranty costs, and costs related to differences in
don’t inspect the product anymore here. As soon as it product yields in the transformation process. Overall, the
comes in the door it goes to the assembly line. companies find it difficult to clearly distinguish between
direct product costs, acquisition costs, and operation costs
Operation costs. The participants in the present study
due to the lack of adequate measurement systems.
mentioned only few operation costs where suppliers
actually add value through cost reductions. Among those
cited by at least one manufacturer were downtime costs,
costs for tooling, warranty costs, and costs related to 5. Implications
differences in product yields in the transformation process.
Regarding the overall distinction of the three cost cate- The present study has a number of implications for
gories, all but one manufacturer find it difficult to separate managers and researchers alike. From a customer perspec-
direct product costs, acquisition costs, and operation costs. tive, our findings allow manufacturers to assess how a
The following passage illustrates the difficulties purchasers supplier adds value in a relationship. Drawing on previous
have in making such a distinction. approaches of profiling customer value perceptions of
physical products (Woodruff & Gardial, 1996), Fig. 2
John: We don’t have anything that says the direct cost is illustrates how a manager could profile an existing sup-
this, the acquisition cost is this, or the operations cost is plier relationship and benchmark it against an alternative
that. We don’t have a monitoring system to cover that. supplier.
Determining the direct cost is simple. I know each unit In this fictive example, Suppliers A and B are compared
price of the circuit board. We compare this supplier’s against each other. Alternatively, a specific supplier profile
unit cost to someone else when we first design a new may be compared with an expected or ‘ideal’ profile. The
program. Thereafter, we monitor a supplier’s quality and suppliers are first evaluated on each value-creating dimen-
delivery performance. If we have zero PPM quality sion. If needed, each dimension may be further broken down
problems and a 100% on-time delivery, then our cost of into its specific subcategories (as described in Fig. 1) using
using that product is minimum. We know that the cost is scores within a range of ‘‘1’’ (very weak) to ‘‘7’’ (very strong).
higher for suppliers that have continuous problems with Then, the supplier’s scores on each dimension are computed
those measurements. So if it gets to the point where we and plotted on the diagram in Fig. 2.
spend more time than it is worth, we will re-source that
The figure shows that Supplier A scores high on quality,
product with another company. We are aware of and
service support, and delivery. In addition, the company
minimize those additional costs with a number of
offers a low purchasing price, that is, Supplier A scores
different tools, but I can’t sit here and distinguish them.
high on this dimension from the customer’s perspective. In
The difficulties managers find in differentiating these turn, the company does not perform well on time-to-
cost elements refer to the absence of adequate information market, supplier know-how, and personal inter-action. In
systems relating costs to specific parts purchased. As an addition, the purchasing manager perceives that
 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693 691

their markets. The assessment described in Fig. 2 can help

suppliers position themselves on the diagram and compare
how they perform against competition. The tool allows
suppliers to search for improvements where they perform
lower than competition, or stress strengths relative to other
suppliers. Overall, it helps suppliers to move away from
competition solely based on price and differentiate them-
selves on other value drivers. In such an exercise, it should
be underlined that qualitative aspects are more important
than quantitative measures. For instance, in our example
described in Fig. 2, Supplier A might want to explore why
the company is perceived to perform lower than Supplier A
on supplier know-how, and what specific actions it would
need to take to move the company to a level comparable
with Supplier B. In turn, Supplier B may want to
investigate what value drivers allow the company to
perform better than other suppliers on process costs. A
thorough understanding of these competitive advantages
may help the company to take the relationship even further
and protect itself from competition.
Finally, our study’s findings provide valuable insights
for modeling relationship value. To capture the various
Fig. 2. Relationship value profiles.
facets of the construct, empirical research should rely on
multidimen-sional scales of relationship value in business
the company does not really add value by continually markets rather than overall measures of the construct.
driving down other costs in the relationship (low score on Diamantopoulos and Winklhofer (2001) argue that re-
process costs). flective specifications of latent variables often mistakenly
Supplier B has a very different profile. The company prevail in the marketing literature. In reflective specifica-
scores well on the value-adding dimensions of product tions, higher-order constructs are assumed to cause their
quality, service support, delivery, time-to-market, supplier dimensions rather than being caused by them. Consequent-
know-how, and personal interaction. This supplier scores ly, dimensions are viewed as strongly correlated and
low on price, that is, the company asks for a higher price interchangeable facets of the focal construct (Bollen &
than competition. This is partly offset by the company’s Lennox, 1991). In turn, formative specifications view a
ability to assist customers in improving process costs higher-order construct as being caused by its dimensions.
through inventory management and order-handling (high From a formative perspective, the higher-order construct is
score on process costs). defined by its dimensions, which need not be highly
As a consequence, the purchasing manager may conclude correlated with each other. The choice between a formative
that both suppliers have very different, yet complementary, and a reflective specification should primarily be based on
value-creating capabilities. Supplier B may have an ideal theoretical considerations (Diamantopoulos & Winklhofer,
profile for developing a new product, that is, sourcing an 2001).
electrical motor for a new household appliance. In turn, when In our context, previous research on relationship value
it comes to sourcing a motor for an existing mature product, does not provide any guidance as to how the different
Supplier A might be better adapted. dimensions should be consolidated. Researchers have
To take the assessment a step further, one may attribute conceptualized relationship value as a reflective construct
weights to the dimensions in Fig. 2. By attributing a without justifying their approach (Lapierre, 2000). How-
relative importance to each value driver, an overall value ever, the findings of our grounded theory study suggest a
score may be calculated for any given supplier relationship. formative measurement approach. Indeed, the value
In our example, the multiplication of relative weights and dimensions need not be highly correlated with each other.
scores obtained on each value dimension results in an For example, a specific buyer – seller relationship may
overall score of 4.2 for Supplier A and 5.25 for Supplier B. well score high on product quality (Dimension 1) but low
On this basis, Supplier B would be considered as delivering on personal interaction (Dimension 6). Such situa-tions are
more value than Supplier A. described repeatedly by participants in our study.
Our findings also offer insights for vendors. In many Consequently, from a methodological standpoint, a
markets, suppliers face increased competition, both domes- formative measurement approach should be used, rather
tically and from abroad. Consequently, managers ask for than reflective measures when modeling relationship value.
ways to avoid a strong trend towards commoditization in
692 W. Ulaga / Industrial Marketing Management 32 (2003) 677–693

6. Limitations value and its relation to other key relationship marketing

building blocks.
As in any empirical research, the results of the present
study cannot be interpreted without taking into account its
limitations. First, the sample of purchasing professionals Acknowledgements
selected for the purpose of this study is not representative
of the population of manufacturing companies. Only The author would like to thank Joe Cannon, Andreas
quantita-tive approaches using large sample sizes could Eggert, John Gaski, Tom Reynolds, John Weber, and the
provide generalizations across manufacturing industries. two anonymous reviewers for their comments on an earlier
Second, our research focused on manufacturer – supplier draft of the manuscript. In addition, the author would like
relationships. Dimensions pertaining to services industries to thank Joe Guiltinan and the Department of Marketing at
were not addressed in the present research. It is expected that the University of Notre Dame for their support in this
the particularities of service industries warrant the project.
development of a different set of value-creating dimensions. Finally, the author would like to acknowledge Chris
Third, relationship benefits and sacrifices were only Cronin, MBA Candidate and research assistant, for his
studied within the manufacturer – supplier dyad. Value valuable contribution to this project.
driv-ers within the larger network of relationships were not
addressed.
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