A recent co-authored paper that examines the performance implications of buyer’s dependence on supplier. We identify ways in which the buyer can manage dependence situations.
Our study shows that the effect of dependence on the supplier is influenced by absorptive capacity and relationship with the supplier. This result is instructive in showing to managers that dependence on the supplier is not always a disadvantage situation (although it can well be) so long as they know how to strategically mitigate the effect, and, more importantly, turn it into a positive outcome. In many cases, buyer’s dependence is unavoidable, e.g. if the supplier is a monopoly due to the specific knowledge, technology or resources it possesses. Also, dependence on supplier could be the consequence of a firm’s decision to focus on fewer rather than more suppliers as this would bring benefits to the buying firm (e.g. quality, less variation, more flexibility, etc.). This study shows how to mitigate the effect of such dependence by building internal capability, i.e. absorptive capacity, as well as external capability, i.e. engaging long-term relationships with suppliers for mutual benefit. Our study shows that buyer’s dependence on its supply chain partners is likely to trigger a positive impact on performance when the focal firm develops absorptive capacity. Therefore, managers must invest time and resources to improve their firms’ absorptive capacity to balance buyer’s dependence to make a positive impact on performance.
Another important implication of our study is that while it is important to build a long-term relationship with a key supplier to reduce dependence, managers must invest in strategic relationships in combination with their firms’ internal absorptive capacity because such joint investment helps the focal firm to more effectively balance buyer’s dependence and enhance performance. By showing the role played by long-term relationship (along with absorptive capacity) in moderating the effect of dependence on performance, our findings also offer an alternative effective governance mechanism in a buyer – supplier relationship. This is because few studies show that when dependence in buyer – supplier relationships grows, contractual governance mechanism also typically increases. The problem with formal (legal) contract is that it will add extra costs to both parties in managing their relationship. In this regard, long-term relationship can be considered as an alternative governance mechanism that can satisfy the interests of both parties at a lower cost, hence, offering higher benefits. Finally, while our study is focussed on the buyers and their relationship with key supplier, the implications of a dyadic investigation extends beyond the dyad. This is because dyadic relationships within a supply chain form the fundamental characteristic of a larger supply network and has implications for the relational patterns in the network. Therefore, what is supposed to be an “exclusive” dyadic relationship behaviour can have wider effects within the supply chain. In our study, we argue that long-term relationship as one behavioural aspect of the dyadic relationship between buyers and their key suppliers can alleviate power asymmetry and reduce opportunistic behaviour in the dependence relationship. As such, it is possible that the relationship between two firms that is characterized by either long-term relationship or opportunistic behaviour could spread to other inter-firm relationships within the supply chain, which will affect the performance of the whole supply chain and its members.