There has been a trend, in the last decade, of buyers outsourcing new product development (NPD) activities to suppliers. In a study my co-authors and I examine the impact of (mis) alignment between buyer-supplier network structure and product architecture on two product development outcomes: product quality and product recalls. The hypotheses are tested on a uniquely assembled database of supplier networks of automakers for 12 vehicle systems. The results suggest that while dense supplier network are associated with higher future product quality and lower future recall magnitude, structural holes are associated with lower future product quality and higher future recall magnitude. Further, the results suggest that product quality partially mediates the relationship between supplier network characteristics and recall magnitude. Interestingly, these effects are significantly moderated by the product architecture. While network density is positively related to product quality of weak design interfaces (i.e., modular systems), structural holes in the supplier network are positively related to product quality of strong design interfaces (integral systems). The results offer valuable insights to managers about the appropriate supplier network structure for superior quality.
The conceptual model for the study is as follows:
A sample network is as follows:
The findings of this study offer numerous valuable insights for managerial practice. In recent years, there has been increased emphasis on improving supply chain performance. The emphasis has been using concepts such as modularization, flexible manufacturing, and lean versus agile manufacturing to boost performance. Despite such advances, the poor performance of supply chains, as evidenced in growing number of product recalls in the marketplace, continues to frustrate and disenchant managers. Our study shows that mismatch between structure of buyer-supplier networks and product architecture aggravates crises such as product recalls.
We find that network density and structural holes have different effects on recall outcomes. Dense supplier networks are associated with superior outcomes such as better quality and lower magnitude of recalls whereas supplier networks with structural holes are associated with greater recall magnitude. The implication for buyers is that they ought to encourage its suppliers to forge ties with each other and facilitate exchange and sharing of information. For example, a supplier facing a quality problem with the root cause not known can benefit from the exchange of solutions from the supplier network. Although maintaining a dense supplier network is costly, the information exchange benefits are significant especially when buyers farm out important processes such as product design and manufacturing to suppliers. In contrast, structural holes in a supplier network increase the magnitude of recalls experienced by buyers.
Importantly, our findings caution managers to refrain from viewing dense supplier networks as beneficial and supplier networks with structural holes as detrimental for quality. Our findings, instead, point to the need to evaluate the normative supplier network structure in conjunction with the architecture of the product. The findings suggest that dense networks are beneficial for weak design interfaces (modular systems) than for strong design interfaces (integral systems). As noted before, when buyers outsource design and manufacturing of modular systems, they cede control to supplier networks. Thick ties between suppliers facilitate coordination and information exchange and ensure that buyers are able to meet varying downstream demand without compromising the quality of weak design interfaces. In contrast, structural holes in supplier networks are more beneficial for strong design interfaces than for weak design interfaces. Buyers need to be located centrally in supplier networks and mediate information flows between suppliers to ensure that the quality of integral systems does not degrade.
We performed a univariate transfer function analysis to better understand the economic value of matching buyersupplier network structure and product architecture. We computed the direct impact of a one standard deviation (S.D.) increase in network density and structural holes in the supplier network on quality and recall magnitude. We evaluate this relationship for strong and weak design interfaces. The high and low levels of SDI are set at the +1 S.D. and −1 S.D. from mean values of the variable, respectively. To compute the dollar impact of decrease in recall frequency because of matching, we turn to previous research that has assessed the shareholder value destroyed by product recalls. Barber and Darrough [6] note that on average a product recall in the automobile industry eroded shareholder wealth by $72.99 million. This amounts to $125.62 million in 2011 dollar terms. Our post hoc analyses reveal that a 1 S.D. increase in network density increases economic value by $29.85 million at low levels of SDI and decreases economic value by $106.41 million at high values of SDI. The total economic value was destroyed because of a mismatch between supplier network density and product architecture is $136.26 million. While dense networks are costly to maintain because of higher number of ties and greater information flow, our findings show that the economic value of dense ties in supplier networks is quite substantial. Similarly, a 1 S.D. increase in structural holes increases economic value by $219.31 million at high levels of SDI and diminishes economic value by $14.27 million at low levels of SDI. The total economic value was destroyed because of a mismatch between structural holes and product architecture is $233.59 million. Cumulatively, mismatches between supplier network structure characteristics and product architecture destroy the buyer’s shareholder wealth to the tune of $369.85 million on an annual basis. The following table summarizes the economic implications of our findings:
Source: Kalaignanam, K., Kushwaha, T. and Nair, A., 2017. The Product Quality Impact of Aligning Buyer-Supplier Network Structure and Product Architecture: an Empirical Investigation in the Automobile Industry. Customer Needs and Solutions, pp.1-17.