1. Supplier Relationships - Trust Lecture 8 Briony Boydell Managing Business Relationships

2. Objectives of lecture Continuum of relationships; –Adversarial –Co-operative Trust and Opportunistic behaviour Goodwill Formation and management of trust Conflict resolution Conclusion and Reading

3. Adversarial Relationships Arm's length, formal communications approach Adversarial attitudes Lack of trust Aggressive, 'win-lose' approach in negotiations- price focus Emphasis on individual transactions and short term contracts Little direct contact and involvement in design activities Reluctance to share information Reliance on goods inward inspection and defect rectification.

4. Collaborative characteristics A small number of preferred suppliers/key customers Longer term contracts, Co-operative attitudes A high degree of formal and informal communications, Open sharing of information. Investment in resources in meeting the specific needs of the partnership Joint problem solving Trust and reciprocity as governance mechanisms.

5. The role of Trust in the supply chain relationship Trust is the foundation of SCM; –it promotes collaboration, risk taking, information sharing, and shared resources. Trust has numerous antecedents including; – open information sharing, commitment, clear expectations, and follow through. The passage of time, high levels of performance, and the fulfillment of promises promote trust. Real trust exists only when both parties agree that it does.

6. Characteristics of trust Trust is Two-Sided –Trust is difficult to establish when power is asymmetrical. When companies do not share risk and rewards equally, the benefits of partnering will be lessened. Trust is Behavior –Consistent patterns of behavior build trust. If unequal application of power is identified as the tool of choice, trust is certain to be lacking in the relationship. Trust Requires Open Information Sharing –Open communication promotes strong and dynamic relationships. Trust is Personal –Suppliers do not trust institutions, they trust people. Trust Means Performance –There is no trust without consistent and outstanding performance.

7. Trust Contractual trust – tied up with contracts Competence trust – each need the others technology etc. Goodwill trust - mutual expectations concerning commitment to the relationship and willingness to refrain from opportunism- present to a larger extent in 'strategic’ type relations, and to a lesser degree in the ‘tactical' relationship.

8. The Importance of Goodwill The three types of trust are interlinked and mutually reinforcing, but goodwill trust can only be sustained if the other two are present (Sako 1992). Goodwill trust seem not only was it shown to reduce the costs and delays associated with traditional monitoring systems and formal legal contracts, but it enabled partners to engage their hearts and minds not just their passive compliance. Goodwill is intangible and difficult to assess and measure and harder still to value

9. Opportunism Opportunism refers to the conscious and calculated efforts to mislead, distort, disagree or otherwise confuse. There are many questions that surround the presence of opportunism; –Why does it occur in relationships? –When does it occur? Self governing theory implies opportunistic behaviour. This sits poorly with the theory of customer focused Supply chains, win-loose not win-win.

10. Building Strategic Partnerships and Trust in a Supply Chain Trust-based relationship –Dependability –Leap of faith Cooperation and trust work because: –Alignment of incentives and goals –Actions to achieve coordination are easier to implement –Supply chain productivity improves by reducing duplication or allocation of effort to appropriate stage –Greater information sharing results

11. Trust in the Supply Chain Historically, supply chain relationships are based on power or trust Disadvantages of power-based relationship: –Results in one stage maximising profits, often at the expense of other stages –Can hurt a company when balance of power changes –Less powerful stages have sought ways to resist –The whole supply chain eventually may loose

12. Building Trust into a Supply Chain Relationship Deterrence-based view –Use formal contracts –Parties behave in trusting manner out of self-interest Process-based view –Trust and cooperation are built up over time as a result of a series of interactions –Positive interactions strengthen the belief in cooperation of other party Neither view holds exclusively in all situations Initially more reliance on deterrence-based view, then evolves to a process-based view

13. Designing a Relationship with Cooperation and Trus t Assessing the value of the relationship and its contributions Identifying operational roles and decision rights for each party Creating effective contracts Designing effective conflict resolution mechanisms

14. The Power Balance in Supply Chain Relationships Organisation’s Dependence High Low Partner’s Dependence Low High Partner Relatively Powerful Organisation Relatively Powerful High Level of Interdependence Effective Relationship Low Level of Interdependence Chopra et al as adapted

15. Creating Effective Contracts Create contracts that encourage negotiation when unplanned contingencies arise It is impossible to define and plan for every possible occurrence Informal relationships and agreements can fill in the “gaps” in contracts Informal arrangements may eventually be formalised in later contracts

16. Designing Effective Conflict Resolution Mechanisms Initial formal specification of rules and guidelines for procedures and transactions Regular, frequent meetings to promote communication Courts or other intermediaries A contract in a relationship is often there to provide a safety net. Once this has to be used or threatened with – the relationship may have already broken down. Effective management is the key to preventing this stage being reached.

17. Managing Supply Chain Relationships for Cooperation and Trust Effective management of a relationship is important for its success Top management is often involved in the design but not management of a relationship Figure process of alliance evolution Perceptions of reduced benefits or opportunistic actions can significantly impair a supply chain partnership

18. Trust Factors Personal contact - Personal relationships generate goodwill and reduce miscommunication Clear specifications - Product, process and contract fulfillment specifications should be clearly stated to reduce confusion and ambiguity Timely payment - Suppliers should be paid as quickly and easily as possible. Equitable treatment - Policies should be applied equally; playing favorites creates suspicion and mistrust, damaging relations. Training – Appropriate support and training provided to customers and suppliers. Open communication - Timely information shared via electronic linkages and face-to-face communication is critical.

19. Trust Factors Feedback - Periodic surveys of suppliers and customers coupled with face-to-face feedback can build trust while helping improve the transaction process. Mutual consideration - Managers should not unnecessarily burden other SC members. Delays or changes in product and service specifications should be shared immediately. Give and take - All suggestions received from other SC members should be evaluated quickly and feedback provided promptly. Confidentiality – Customer/Supplier information should remain strictly confidential. Integrity - SC managers should always exhibit a desire to fulfill all contract obligations without hassle or argument.

20. Conclusion & Reading Relationships require trust and collaboration for long term effectiveness i.e. ‘win-win’ scenario Trust can be implied or implicit by the use of contract With conflict resolution the contract use may be a stage too far – resolution should occur before the break down Read Chopra et al