Thesis statement: Customer-supplier relationships that are formed and conducted is significantly affected by the incentive structure that exists between two parties.
I) Introduction to Customer-supplier relationships
11) Factors that influence Customer-supplier relationships
a) Method by which the surplus shares are divided between the two
b) Nature of interaction. The instances where the customer and supplier interact which include.
i) Order placement
ii) Order payment
iii) Order fulfillment
III) Dimensions have been adapted by many suppliers and buyers.
a) Operational linkages
b) Relationship specific adaptations
c) Co-operative norms
d) Process of the information exchange
IV) Factors, which determine the way in which surplus value is shared and how the interaction
between the two parties is carried
a) Powers of the relationship that exist between the two parties
b) The incentive structure that exists between the customer and the supplier.
V) Key influences on the nature of interaction in the relationship that exist between the buyer
a) Transaction salience
b) Transactional uncertainty
c) High or medium asset specificity
There is relationship, which usually exist between the customer and supplier in any business undertaking. There are various factors, which affect the kind of relationship that exist between the two. One of the factors, which have great impact on these relationships, is the incentive structures that exist between the two parties. This paper looks at the thesis statement that Customer-supplier relationships that are formed and conducted are significantly affected by
the incentive structure that exists between two parties. The paper looks at the role that the incentives play in the formation and conduct of buyer supplier relationship. The incentive structure in any business undertaking is usually determined by the kind of relationship that exists between the two parties. The relationship between the buyer and the supplier is characterized by two elements. The elements are the nature of the interaction between the two and the way in which the surplus value is divided between both parties.
The relationship that exists between the buyers and the suppliers in the business market is usually very complex. The models constructed when conducting studies on these relationships should not include too many variables. By focusing on the buyer – supplier relationship based on the nature of interaction between the two and the method by which the surplus shares are divided between the two there are six different relationship types, which arise. The most important things, which regard buyer supplier relationship, is the nature of commercial outcome and the kind of interaction between the two parties. (Venerable, 2009). Looking at commercial outcome of the relationship between a buyer and the supplier here, we can use the surplus value, which is provided by economics. The surplus value in broad sense is the difference, which exist between the cost of production by the supplier, which also include the normal profits made in the business and buyer utility. Therefore, looking at buyer supplier relationship the main interest in this is the extent by which the two are able to attain a share of the value, which is the surplus. The share of the surplus, which is usually obtained by the buyer, is referred to as consumer surplus. On the other hand, the share of the surplus, which is usually obtained by the supplier, is known as producer surplus. Both parties in their business undertakings always seek to maximize their share of surplus value both in the short term and in the medium term. This is true regardless on the view of business behavior which is characterized by seeking of self-interest or which is characterized by opportunism (Williams & Curtis, 2007).
It is good to note that the battle, which exists over the surplus value, is not always due to obtainment of a static amount of value. There are certain buyer supplier relationships where the surplus value is treated as static entity. Despite this buyer and supplier when still having interest to in obtaining the highest possible share of surplus value, can establish relationship on how to work together in order to increase the surplus value which is created by their interaction. This brings out the second dimension of buyer supplier relationship, which is based on the nature of the interaction, which exists between the supplier and the buyer. This is the relationship that consists of interaction, which has a level of contact, which is necessary to exchange the essential commercial information, for instance, in regard to order placement, order payment and order fulfillment (Williams & Curtis, 2007). In this case, the nature of the relationship reveals the desire on one part or on both of the parties to minimize the cost of the business transactions. In this kind of a situation, this relationship, which involves greater levels of contact, is able to be placed along a continuum. This continuum involves the investment level that is required inorder to undertake various collaborative activities that one or both of the parties may suggest. The type of activities may vary from relationship to relationship. According to Cannon and perreault, suppliers and buyers may interact in various dimensions. The four dimensions have been adapted by many suppliers and buyers. They include operational linkages, relationship specific adaptations, co-operative norms and process of the information exchange (Venerable, 2009).
The process of information exchange may include the process by which transfer of proprietary technical information is done. It also includes cost of information transfer and the transfer of forecasting information. Operational linkages are the procedures and systems, which are established by the two parties in order to facilitate the flow of services, goods information or payment. Example of operational linkages include just in time arrangements or an e procurement system, for instance, where the supplier posts its catalogue on the intranet of the buyer. There are also the corporative norms which are the agreed upon standards of conduct which underpin the interaction between the supplier and the buyer in whatever relationship might exist between them. The relationship specific investment is the non-transferable investments, which are often made in business relationships. The relationship specific investments include training in particular systems, adaptations to processes or products or it may involve location of facilities near to either the supplier or the buyer sites. Closer relationships also involve a lesser or greater investment in these kind of investments. The most important thing in these relationships is the level of investment that is required for the type of relationship that is suggest by both parties (Sharma, 2009).
There are factors, which determine the way in which surplus value is shared and how the interaction between the two parties is carried. The powers of the relationship that exist between the two parties or the incentive structure that exist usually determine the way the surplus value is shared between the two parties. In this case, power is refer to the ability of one party to make the other party act in a way that the party would not have done. Therefore, in this case power comes from dependency. There are key influences on the nature of interaction in the relationship that exist between the buyer and supplier. One of the factors is transaction salience. This is whereby purchases of small commercial values may not lead to a desire on either party to undertake collaborative activities unless activity may be of high operational importance to the buyer. This is because the proportional transaction cost usually makes the efforts unattractive. The other factor is transactional uncertainty. This is whereby by the time the two parties enter into contract the two parties may not be aware of the goods and services required by the buyer (Sharma, 2009). This brings the need for the two parties to work together in order to come up with a solution. This may involve exchange of proprietary information or making of specific investments. The uncertainty over demand also lead to exchange of information, for instance, the parties may establish a vendor managed inventory agreement. In this case, uncertainty usually acts as a driving force for establishment of collaboration. If the transaction is of high or medium asset specificity, there is also need for a relationship to be established between the two parties. This is because transactions of high asset specificity are supposed to be undertaken internally (Fill & Fill, 2004).
Fill, C. & Fill, K. (2004) Business-to-business marketing: relationships, systems and communications, 4th edition, New York, Financial Times Prentice Hall.
Sharma, K. (2009) Logistic management: A Competitive Advantage for the New Millennium, New Delhi, Global India Publications.
Venerable, A. (2009) Managing in a Five Dimension Economy (Gpg) (PB), New York, IAP.
Williams, J. & Curtis, T. (2007) Marketing Management in Practice, 4th edition,