Capturing Value Creation in Business Relationships: A Customer Perspective

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 Republique, 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
There is a growing recognition that collaborative relationships in business markets offer significant opportunities
for companies to create competitive advantages and achieve
superior results (Hewitt, Money, & Sharma, 2002; Jap,
1999; Lyons, Krachenberg, & Henke, 1990). In many
business markets, manufacturers reduce the overall number
of companies in their supply base and focus on closer
relationships with key suppliers. Consequently, when
assessing their supplier portfolio, customers need to decide
when to invest in a specific supplier relationship, when to
maintain and develop existing relationships, or when to
divest from underperforming relationships.
Many suppliers, in turn, face a growing trend towards
commoditization of products (Rangan & Bowman, 1992). In
search of beating the commodity magnet, they increasingly turn toward new ways of differentiating themselves
* Department of Marketing, Mendoza College of Business, University
of Notre Dame, Notre Dame, IN 46656, USA. Tel.: +1-574-631-9997, +331-49-23-21-21; fax: +1-574-631-5255, +33-1-49-23-22-48.
E-mail addresses: wulaga@nd.edu, wulaga@escp-eap.net (W. Ulaga).
0019-8501/$ see front matter D 2003 Elsevier Inc. All rights reserved.
doi:10.1016/j.indmarman.2003.06.008
through improved customer interactions (Vandenbosch &

Dawar, 2002). As a consequence, suppliers also need to
understand how they can create and deliver value in
business-to-business relationships.
The measurement of value creation in buyer seller relationships is still in its infancy, and a sound understanding of
the concept is a prerequisite for developing reliable and valid
assessment tools (Eggert & Ulaga, 2002; Ulaga, 2001).
Emerging studies investigate relationship value based on
dimensions derived from theory. However, a sound conceptualization grounded in managerial practice is missing. The
present research attempts to close this gap by exploring
relationship value from a grounded theory perspective. To
work towards this goal, the rest of the paper is structured as
follows: First, we position our research within the emerging
literature on relationship value. Next, we describe our
research methodology. We conducted ten in-depth interviews
with purchasing managers in nine manufacturing companies
located in the Midwest of the United States. Analysis and
interpretation of results identified eight value drivers in
supplier relationships. Finally, we discuss implications for
measuring relationship value and provide directions for
further research.
678
W. Ulaga / Industrial Marketing Management 32 (2003) 677693
2. Relationship value
Exchange has been accepted as a core concept of the
marketing discipline (Bagozzi, 1975; Hunt, 1991). In fact,
most current definitions of marketing explicitly include
exchange in their formulations (Kotler & Armstrong,
2001). Market exchanges take place because all parties
involved expect to gain value in the exchange. Therefore,
value has always been the fundamental basis for all
marketing activity (Holbrook, 1994).
While the marketing literature contains a variety of
definitions stressing different aspects of the concept, four
recurring characteristics can be identified: (1) Customer
value is a subjective concept (Kortge & Okonkwo, 1993);
(2) it is conceptualized as a trade-off between benefits and
sacrifices (Zeithaml, 1988); (3) benefits and sacrifices can
be multifaceted (Grisaffe & Kumar, 1998); and (4) value
perceptions are relative to competition (Gale, 1994). In
short, customer value is generally defined as the trade-off
between the benefits (what you get) and the sacrifices
(what you give) in a market exchange (Zeithaml, 1988).
Most research on customer value adopts a transactional
approach focusing on product-related issues, neglecting
relational dimensions of customer-perceived value (Dwyer
& Tanner, 2002; Parasuraman & Grewal, 2000). In reviewing the value literature and its implications for relationship
marketing, Payne and Holt (1999) state that the most
recent development has been to consider customer value
from the viewpoint of relationship marketing. This is
described as relationship value.
The conceptual roots of the relationship value construct
lie in business and services marketing. Anderson, Jain, and
Chintagunta (1993) define value in business markets as the
perceived worth in monetary units of the set of economic,
technical, service, and social benefits received by a customer firm in exchange for the price paid for a product offering,
taking into consideration the available alternative suppliers
offerings and prices. Their definition represents one of the
first efforts to identify and categorize the relational dimensions of the value construct, namely, social and service
benefits.
Wilson and Jantrania (1995) examine the creation of
value in industrial buyer supplier relationships. Based on
conceptual research, they develop a three-dimensional categorization of relationship value: economic, strategic, and
behavioral value. Though they expect substantial difficulties
in an empirical assessment of the overall value proposition
as perceived by customers in a business relationship, they
conclude that relationship value is a problematic concept
which cannot be ignored.
Ravald and Gronroos (1996) develop a generally applicable framework of value perception in exchange relationships. They point out that the trade-off between benefits and
sacrifices in long-term-oriented exchange processes is not
restricted to the single episode level. Rather, value assessments should take into account both episode and relation-
ship benefits and sacrifices. Elsewhere, Gronroos (1997)

distinguishes between two benefit and two sacrifice dimensions. Customer-perceived value can be described as core
solution plus additional services divided by price and
relationship costs or core plus/minus added value. According to Tzokas and Saren (1999), the major contribution of
this framework is to bring into the picture the costs and
benefits associated with the relationship itself as determinants of the overall value perceived by the customer.
More recently, Moller and Torronen (2003) suggest to
conceptualize value in a supplier customer relationship
along three dimensions: the suppliers efficiency function,
the effectiveness function, and the network function. The
efficiency function refers to the efficacious use of resources
in a business relationship. Effectiveness refers to an actors
ability to invent and produce solutions that provide more
value to customers than existing offers. The network function finally takes into account the potential of value creation
in the larger network beyond the dyadic supplier customer
relationship.
Empirical research focusing on relationship value in
business markets from a customer perspective is limited to
a few studies. Based on data collected among providers of
information, communication, entertainment, and financial
services, Lapierre (2000) identified 13 drivers of relationship value and grouped them into three benefit dimensions
(product, service, and relationship benefits) as well as two
sacrifice dimensions (price and relationship costs). Data
collection in Lapierres study was restricted to business-tobusiness services. Consequently, the findings of Lapierres
study cannot be generalized to industrial buyer seller
relationships. In addition, the conceptualization of relationship value in her study included a number of marketing
variables, for example, trust and solidarity, which the
marketing literature typically considers as distinct constructs. Such a conceptual overload may pose significant
problems of discriminant validity.
Walter, Muller, Helfert, and Ritter (2003) surveyed 230
purchasing managers in German manufacturing companies.
The authors suggest four main dimensions of value creation in a buyer seller relationship labeled cost function,
quality function, volume function, and safeguard function. In addition, four indirect functions complement a
suppliers potential of value creation in a business relationship: the market function, the scout function, the
innovation development function, and the social support
function.
Table 1 summarizes the emerging body of research on
relationship value. A careful review of these conceptualizations raises three important issues. First, although some
common dimensions emerge, the proposed constituents of
relationship value vary considerably among these definitions. Second, most dimensions are only described in very
broad terms and do not provide a clear understanding of
their underlying facets (i.e., strategic benefits or relationship costs). Finally, no guidelines are provided as to how
679
Table 1
Conceptualizations of relationship value
Authors
Benefit dimensions
Sacrifice dimensions
Comments
Anderson et al. (1993);

Anderson and Narus
(1995, 1999)
Wilson and Jantrania
(1995)
Ravald and Gronroos
(1996)
Gronroos (1997)
Lapierre (2000)
economic benefits, technical benefits,

service benefits, social benefits
price
theory-based
economic benefits, strategic benefits,

behavioral benefits
episode benefits, relationship benefits
none
theory-based
episode sacrifices,
relationship sacrifices
price, relationship costs
price, relationship-related
sacrifices
theory-based
Moller and Torronen

(2003)
Walter et al. (2003)
core solution, additional services

product-related benefits, service-related
benefits, relationship-related benefits
efficiency function, effectiveness
function, network function
direct functions:
quality
volume
safeguard
indirect functions:
market function
scout function
innovation function
social support function
these dimensions could be combined to form an overall

measure of relationship value.
When investigating relationship value, researchers may
draw on the existing literature on vendor performance
evaluation in industrial marketing (Hutt & Speh, 2001),
purchasing (Lehmann & OShaughnessy, 1982; Timmerman, 1986), and supply chain management (Monczka,
Trent, & Handfield, 2002). For example, Hutt and Speh
(2001) mention key criteria such as quality, service, and
price. Similarly, Timmerman (1986) describes how multiattribute models may be used to monitor supplier performance. Supply Chain Management texts also provide
information on how to evaluate supplier performance. For
example, Monczka et al. (2002) suggest two categories of
measures when monitoring supplier performance. According to the authors, objective (quantitative) measures refer to
three categories: delivery performance, quality performance,
and supplier cost reduction. In turn, subjective (qualitative)
measures include factors such as the suppliers problem
resolution ability, technical ability, progress reporting, corrective action response, cost-reduction ideas, new-product
support, and buyer seller compatibility.
Based on these findings, the objective of our research is
to address the three shortcomings of previous conceptualizations of relationship value and to explore the concept from
the perspective of how customers actually view value
creation in a supplier relationship. Consequently, we suggest
to ground the investigation of relationship value in the
language of relationship managers. This approach complements our exiting knowledge and offers new insights for a
better understanding and measurement of the construct. In
line with this objective, we propose a qualitative methodology in this research.
direct function
cost reduction
theory-based
survey of 209 and 129 purchasing
managers in the Canadian IT
and finance sectors
theory-based
survey of 230 purchasing managers
in German manufacturing companies
3. Methodology
3.1. Grounded theory
Researchers have recommended the use of qualitative
methods (1) to explore phenomena about which little is
known or (2) to gain novel understandings about existing
phenomena (Stern, 1980). In addition, qualitative
approaches can be used to obtain the intricate details about
a specific phenomenon under investigation (Strauss &
Corbin, 1998). Among the many types of qualitative research methodologies, grounded theory was first presented
by Glaser and Strauss (1967) in an attempt to bridge the gap
between theoretically uninformed empirical research and
empirically uninformed theory, by grounding theory in
data (Charmaz, 1983; Goulding, 1998). Strauss and Corbin
(1998) define grounded theory development as a process
whereby theory is derived from data, systematically gathered and analyzed through the research process. Thus,
grounded theory offers new insights and a better understanding of phenomena by the researcher.
The present research was designed to investigate the
meaning of the constructs various dimensions, especially
as research on this construct is still at an early stage. The
profound understanding of relationship value and its facets
provides the foundations for developing sound measures of
the concept.
3.2. Data collection and analyses
3.2.1. Sampling procedure
Data were gathered through in-depth interviews with
purchasing managers in manufacturing companies located
680
in the Midwest of the United States. Companies were

contacted through the local Chapter of the Institute of
Supply Management (ISM) and through the alumni network of a Midwestern University. Based on these two
sources, 21 purchasing professionals were identified. The
managers were contacted by telephone and invited to
participate in the study. Ten managers agreed to participate, and interviews were scheduled over a period of three
months.
3.2.2. Unit of analysis
The unit of analysis for the present research was a
specific collaborative manufacturer supplier relationship.
As the present study aimed at identifying the variety of
underlying relationship value dimensions in business markets, a sample of relationships from different manufacturing
industries was required. At the same time, key manufacturing characteristics of participating companies had to allow
for comparability across the participating firms. Consequently, companies in batch-processing assembly industries
were contacted (SIC Codes 34 38).
3.2.3. Informants
Participants were influential decision-makers involved in
selecting and monitoring the supplier relationship. The
selection of key informants involved in the manufacturer
supplier relationship was critical in the process of identifying and describing value-creating relationship dimensions.
Consequently, only senior-level participants were invited to
participate in the study.
3.2.4. Sample characteristics
The final sample consisted of manufacturers in a variety
of areas, such as aircraft landing systems, amplifiers and
microphones, audiovisual projection equipment, automobiles, braking systems, electronic components, household
appliances, orthopedic products, and vacuum pumps. Products considered by participants also varied significantly.
Customers purchased aluminum wheel forgings, car seats,
electronic components, motors, pins, springs, and surgical
instruments.
The size of participating companies ranged from smalland medium-sized manufacturers to multinationals, employing a workforce between 400 and 348,000. The selected
buyer supplier relationships had been in place between 2
and 25 years.
The final sample consisted of ten participants from nine
manufacturing companies. The sampling process ceased
when saturation was reached, indicated by information
redundancy. Table 2 summarizes the main characteristics
of the sample used in the present study.
3.2.5. Interview guide
The interview guide was composed of three parts. In the
first part, participants were asked to select a specific
product they purchased from at least two suppliers.
Respondents were further asked to describe in detail the

product, how it was used in the manufacturing process, its
relative importance in the final product, and the demand
and supply context. The selected product had to be an
important component, unlike a commodity or a MRO
product, for which the customer maintained a collaborative
relationship with suppliers. Participants were asked to
specify why they considered a particular relationship to
be collaborative, and indicators from the literaturesuch
as idiosyncratic investments or coordination efforts (Jap,
1999)were used to ensure that all participants had a
close manufacturer supplier relationship for a key component in mind. The purpose of this initial stage was to
ask the respondent to consider a specific use situation and
to prepare for a comparison of alternative buyer supplier
relationships.
The second part was designed to identify the different
relationship value dimensions. Respondents were asked to
describe how suppliers create value for their organizations,
and to illustrate the different directions of value creation
through examples from the specific supplier relationship
under consideration. To facilitate the process, participants
were asked to describe activities between the supplier and
the manufacturer, which then allowed the interviewer to
probe into the different benefits and costs perceived in the
relationship. Particular attention was given to the comparison of each companys main supplier and, where possible, its second-best alternative supplier of the same
product.
Finally, in the third part of the interview guide,
participants were invited to describe their company
and their own background. As the empirical study
relied completely on the perceptions of key informants,
it was important that respondents were competent to
report on the different dimensions of relationship value.
Variations in respondents background, position, knowledge, and perceptions of the relationship potentially
influence their competency and knowledge of the relationship dimensions under investigation. Hence, the
interview guide contained a final set of questions
referring to the respondents position and tenure with
the company.
3.2.6. Analysis and interpretation
Interviews lasted approximately 1.5 2 h. Each interview
was audiotaped and verbatim transcribed. When possible,
the interviews were supplemented by plant tours and documents provided by participants. Analyses of the verbatim
interview transcripts followed traditional grounded theory
guidelines (see, e.g., Flint, Woodruff, & Gardial, 2002).
After the first few interviews, analyses were started early to
allow for interpretations to inform and direct subsequent
interviews. Grounded theory coding was used, that is, open,
axial, and selective coding, to identify the different relationship value drivers and their subdimensions (Strauss &
Corbin, 1998).
681
Table 2
Study sample
Participant name
Company activity
Company size
Product purchased
Frank: Business Manager

e-procurement, 12 years in
industry, 4 years in
purchasing, 4 years in
e-business, age 35
Scott: Director Global
Commodities, 6 years in
engineering, 7 years in
purchasing, age 38
Jeff: Senior Purchasing
Supervisor, 13 years in
purchasing, age 38
Jack: Director of Purchasing,
25 years in production
control and purchasing,
age 45, and Shawn:
Project Manager Global
Sourcing, 4 years in
purchasing, age 28
Richard: Director, Strategic
Sourcing, 18 years in
purchasing, age 40
John: Purchasing Manager,
16 years in purchasing,
planning and control, age 38
Jerry: Purchasing Manager,
planning and inventory
control, age 50
Mary: Purchasing Manager,
quality control, age 45
Denice: Contract Administrator
Supervisor, 22 years in
purchasing, age 42
automobiles
sales: $177 billion,

employees: 347,700
interior for a specific vehicle;

one system supplier, four potential
alternative suppliers
household appliances
sales: $11 billion,

employees: 59,408
electric motors; two main suppliers,

multiple secondary suppliers
automotive brakes
sales: $6.2 billion (division),

employees: 21,750 (division)
pins; one major supplier (95%)
aircraft landing systems
sales: $9.7 billion (division),

employees: 37,500 (division)
aluminum forgings for aircraft wheels;

one major supplier (90%), one alternative
supplier (10%)
orthopedic reconstructive
implants
sales: $1.2 billion,

employees: 3600
surgical instruments; two major supplier,

60 suppliers for product category overall
electric sensors
sales: $458 million,

employees: 5313
circuit boards, one major supplier (80%),

one alternative supplier (20%)
video-projection equipment
and audiovisual support products
sales: $110 million,

employees: 500
springs; one sole supplier
vacuum pumps
sales: $82 million,

employees: 400
electric motors; two main suppliers
amplifiers
sales: $75 million,

employees: 450
standard electronic components;

one main supplier, several other suppliers
All participants are key decision-makers in the purchasing departments of their firms. Names are pseudonyms.
3.2.7. Assessment of trustworthiness

The trustworthiness of the present research findings was
assessed by applying the techniques of triangulation, informant feedback, and replication recommended by Miles and
Huberman (1994).
In a first step, the verbatim interviews were contentanalyzed by two additional researchers who had not previously participated in the interviews. The researchers independently developed their relationship value drivers and
subdimensions using the same material and procedures as
the main researcher.
In a second step, results of all three researchers were
compared to identify those areas where they disagreed. All
three researchers consistently identified the eight generic
value drivers. However, differences existed in terms of (1)
the labeling of each dimension and (2) the attribution of
subdimensions to value drivers.
To resolve the abovementioned problems of labeling and
correct assignment of subdimensions to each of the eight
value drivers, feedback from study participants was gathered

in a third step (Denzin, 1978) and adjustments were made.
Finally, the studys methodology and findings were
presented during a workshop with 27 purchasing managers
of the local Chapter of the ISM. Participants received a
description of the value dimensions and were asked to
comment on how well they reflected their practice and
whether they recommended changes. Only a few changes
in wording and illustrations of value drivers were made after
this final step.
4. Results
Eight dimensions of value creation in manufacturer
supplier relationships emerged from our interviews with
purchasing managers (Fig. 1). In this section, the relationship value drivers and their dimensions are discussed in
detail.
682
Fig. 1. Relationship value drivers.
4.1. Relationship value Dimension #1: product quality

Above and beyond all other aspects, manufacturers
maintain relationships with suppliers to source products
and services needed in their transformation process (Homburg & Rudolph, 2001). The participants in our study
consistently report that it has become increasingly difficult for suppliers to differentiate themselves from competition merely on the basis of product quality. Quality is
a given, and suppliers must meet quality standards to be
included in the supply base. In most cases, quality or
engineering departments are asked by purchasing to
preselect suppliers, which are then added to a pool of
qualified suppliers.
The companies mainly search for technical performance
and reliability when referring to product quality. The suppliers products are expected to meet a set of technical
specifications within certain tolerance levels:
John: For a circuit board, we look for a specific output.
We want to make sure there are no cracks in the
hybrids. None of the parts must be skewed on the
circuit board. The part has to be dimensionally and
electrically correct per a set of specifications. We gave
the supplier a drawing that outlines the physical
dimensions, the distances between the pads, where the
capacitors are supposed to be, where the traces are.
And then there are the electrical specifications the
supplier has to meet, that is, the output this circuit
board has to produce.
The participants also mention the importance of delivering consistent quality levels over time. In the example of a
spring supplier, Jerry recently switched suppliers because
the previous supplier delivered inconsistent quality. He
found significant variations in the characteristics of springs
received. The supplier was unable to solve the problem and
had to be replaced by an alternative springs manufacturer.
Jerry: We switched supplier of springs last year. With the
previous supplier, we were having too much variations.
When we went back to the supplier to ask him to help us
improve the situation, we found out, through interviewing and his answers to us, that he didnt have the
technical capabilities to help us.
Several participants in our study underline the pressure
for a continuous improvement of quality levels. Being at the
cutting edge of product quality is especially mentioned in
our interviews in the automotive and household appliances
industries. The following passage illustrates this issue:
Scott: One of the key elements of a supplier relationship
is having the best-in-class quality for the components
that they supply and understanding the system that the
component goes into so that they know the implications
of their product in the functionality of our product. We
expect suppliers to work with us and try to continuously
drive quality. As you see more European and Asian
products come into our country, the bar gets raised all
the time, and you have to benchmark yourself against
different competitors than those you had in the past.
Most of the companies in our study have implemented

incoming inspections for product quality using quantitative
measures, such as the number of shipments rejected, as
opposed to the total number of shipments received or Parts
per Million (PPM) to periodically review suppliers product
quality. Some even have implemented supplier certification
programs, thus abandoning incoming inspections at their
facilities.
When quality problems occur, several participants mention that their organization will work with the supplier to
improve product quality levels through Supplier Development Programs composed of members from both the
suppliers and customers organization.
Jeff: Actually, we set an internal standard, like a PPM
level (Parts per Million), at the beginning of the year. We
work with every supplier that doesnt hit the target
through our Approved Supplier Development Programs. We go in and find out what problems they have.
In some instances, our Supplier Quality Group actually
helps them to develop test procedures, to find the latest
technology, to help them fix issues on the line. Quality is
a major component, but we do help them out in
identifying where they can improve.
Recurring quality problems over time strain the relationship and ultimately may result in discontinuing the relationship, especially if the supplier is unable to solve quality
issues. The following passage from Jacks interview illustrates this point:
Jack: Most of [our suppliers] are all delivering a quality
product. If suppliers are not delivering a quality
product, we get rid of them. In fact, we had a supplier
from Mexico, and we tried to work with them on
quality problems for a long time. But then, we recently
made a decision they were never going to be up to our
quality standardsat least not in the near terms. So we
decided to take them off the list and go somewhere
else.
Based on these findings, we identify product quality as a
key driver of relationship value. In line with previous
research (Crosby, 1979; Juran, 1974; Ulaga & Chacour,
2001), we define product quality as the extent to which the
suppliers product meets the customers specifications. Key
aspects of product quality are performance, reliability, and
consistency over time. Typical measures across industries
are Returns or PPM.
4.2. Relationship value Dimension #2: service support
In many business markets, suppliers provide a blend of
tangible products and a range of accompanying service
elements (Hutt & Speh, 2001; Levitt, 1981). These service
components play an important role in differentiating a
suppliers offering (Anderson & Narus, 1995).
Beyond product-related services, such as product warranty and availability of spare parts, the participants in our
683
study mention a number of additional services. Suppliers

need to provide the right information at the right time. This
value driver of customer information has several facets.
First, manufacturers expect to get a hold of suppliers
whenever needed (supplier availability). Richard, director
of strategic sourcing for a medical equipment manufacturer,
illustrates this value driver:
Richard: Their presence brings value to us. They either
have to be here, or we need to be able to get a hold of
them. If changes need to be made, their quick response is
paramount. When we design instruments, we will take
several prototypes and go out to do cadaver studies with
a few doctors to critique the instruments. If we need
major design changes, they have to be able to stop,
regroup, and respond with those design changes.
In addition to supplier availability, our participants voice
their need to receive appropriate information (information
appropriateness). When changes occur, suppliers are
expected to follow through in a timely manner. Speed of
information may represent a competitive advantage, as
illustrated in the following passage:
Jeff: We get requests for changes from our customers all
the time. Sometimes we need to get back to them within
a few days. Its almost like a love hate relationship
with our customers. There are not many carmakers out
there. You need their business. It is kind of hard to not be
hard on our supply base. As much as we are getting
pushed, we need to push them, and it just trickles down.
It is a domino effect. (. . .) Details are important. If we
get a request for a quote from Ford, and our supplier just
gives us a number on a paper, it doesnt help us out.
Details are important, because Chrysler and Ford always
break everything down.
A third component within this dimension is the possibility of outsourcing tasks to suppliers such as assembly,
design work, and product testing. Assembly is an area of
major concern to manufacturers. The purchasing professionals we interviewed mention three main vectors of value
creation in outsourcing assembly tasks to suppliers illustrated in the following passages from the interview with a major
car manufacturer.
First, suppliers create value for their customers through
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
coordinate.
Frank: Consolidation in the supply base is one way in
which the suppliers are creating value. For the [car
model], we looked at suppliers that could provide an
entire interior, so this meant that they would be supplying
the instrument panel, the floor consol, the overhead
system, the door panels, the side wall trim, garnish, the
rear shelf and even the carpeting.
684
Second, synchronizing both the suppliers and the customers production schedules allows to deliver parts in a
sequenced manner and to reduce inventories.
Frank: We try to make our assembly plants as lean as
possible. We try to reduce the amount of inventory in the
plants and the time it takes to make vehicles. So one of
the things we do is to sequence parts. We ask suppliers to
ship parts in a certain order as to how we are going to
assemble our cars. We shift some of our space requirements to the supplier. They need to be able to schedule
how they are going to manufacture their products, so
they have enough parts and put them in the right order.
And when we need them, they will pull them out and put
them in the right order to send to our plant. There are
additional labor, space and scheduling requirements on
the part of the supplier. This means substantial savings
because the assembly line worker only needs to go to the
next spot and pick up the part. This could be for colors,
but also for other parts, say air conditioning systems. You
have less modules to chose from, less chance to make a
mistake too by the worker on the assembly line.
Finally, outsourcing subassembly tasks to the supplier
represents a third benefit for manufacturers, liberating plant
space that can be allocated to other activities.
Frank: In many cases suppliers take on some of the
subassembly operations. Their facilities are close to our
assembly plants which leads to large reductions in plant
space. So we can either build more vehicles, have more
lines, or reduce the time that it take to build a vehicle.
Consequently, service support can be regarded as a
second key dimension of relationship value. In addition to
providing product-related services, suppliers create value in
two main service support areas: customer information and
outsourcing of activities.
4.3. Relationship value Dimension #3: delivery performance
The purchasing managers in our study identified delivery performance as a third dimension of relationship value.
This is consistent with the business marketing literature,
which describes delivery as a major criterion in supplier
evaluation (Hutt & Speh, 2001). In all but two interviews,
quality, service, and delivery were mentioned on topof-mind as important value drivers in a manufacturer
supplier relationship. But what exactly do manufacturers
value when considering a suppliers delivery performance?
Not meeting delivery schedules results in significant
coordination problems for customers, and, ultimately, in
additional costs for premium freight charges. Frank, head
of e-procurement, describes the consequences of late deliveries in the car industry.
Frank: Another issue is on-time delivery of parts. We try
to streamline how much inventory we have in the plants
and in transit as much as possible. If the suppliers are
not meeting their schedules in a timely fashion, that

causes a big hiccup and may result in premium freight
to get parts here, and the supplier would have to pay for
it if they were at fault. It also causes problems for us
because we need to call and make sure that we have
parts there. We may have to send somebody to help the
supplier. There are additional costs on us if we have
suppliers who are not meeting their schedules. (. . .)
Basically, delivering the right part at the right time in
the plants, and in the after market as well, are our main
requirements.
If delivery requirements change, manufacturers expect
their supplier to adjust to these modifications (delivery
flexibility). Such changes in delivery schedules may occur
due to spikes in demand or changes in the mix of products
delivered. The suppliers responsiveness when emergency
deliveries are needed is highly valued by manufacturers.
Jack: You will notice the supplier that are your best
friends and are customer-focused. When you are down
because someone didnt count the parts right or there was
a mistake in the inventory, you call them up and say We
are shut down, we need these parts tomorrow, how soon
can you get it to us? A lot of supplier will turn their shop
around for you. And they will drive parts in here from
Ohio or Chicago. So they can keep us running. Those are
the things that really stick in your mind. Suppliers that go
above and beyond what a typical supplier will do.
Flexible adjustments are particularly important as manufacturers increasingly shorten delivery cycles through justin-time delivery. As a consequence, suppliers are expected
to keep safety stocks or locate warehouses close to the
customers facilities.
Finally, participants mentioned accuracy of delivery.
Delivering the right parts, that is, minimizing missing or
wrong parts in shipments saves time and effort for the
customer.
In summary, delivery is a third relationship value driver
in business-to-business relationships. Suppliers create value
in this area by consistently meeting delivery schedules (ontime delivery), their capability to adjust to changes in
delivery schedules (flexibility), and their capacity to consistently deliver the right parts (accuracy).
4.4. Relationship value Dimension #4: supplier know-how
In many industries, manufacturers turn to suppliers to
help them achieve a stronger competitive position (Ganesan,
1994), and recent research suggests that manufacturer
supplier relationships represent a strategic resource to gain
competitive advantages (Hogan & Armstrong, 2001; Jap,
1999; Wernerfelt, 1984). What are the critical resources
customers seek to access in a supplier relationship? Kalwani
and Narayandas (1995) state that manufacturers search to
gain access to the suppliers resources, skills, and strength in
long-term manufacturer supplier relationships.
Suppliers may hold a specific technical expertise, which

the customer may not have in-house or may not want to
acquire. Therefore, manufacturers may benefit from their
suppliers know-how in multiple ways. First, suppliers
continuously screen available supply sources for their customers and present them with alternative new solutions
based on their in-depth knowledge of the supply market
and its evolution.
Denice: (This supplier) comes to our facility at least once
a week and works very extensively with our design
engineers. So if they have an application for a semiconductor, they give him the performance specifications
and let him come back with one or two solutions. This
reduces the investment we have to make in terms of
knowledge and experience of individual components.
The semi-conductor market is changing every single day,
and to keep abreast of all new products in the market
would be very expensive for us to do. So we rely very
heavily on this supplier to bring us those products and
give us awareness. It also means that we can have
younger people on the engineering staff. They dont have
the same background.
Past experience with a customers products and a thorough understanding of the manufacturers operations create
an opportunity for a supplier to add value in the improvement of existing products. Our interview with Shawn
illustrates this point:
Shawn: Suppliers that have a lot of experience with your
products know how to make parts efficiently and
effectively. A supplier that has done a specific part for
years can turn around and make a change at a third of 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
make suggestions. I had a supplier call me and say This
part is exactly like that part, exactly the same fit, form
and function, except that one has an additional process
on it. Do you want to make an engineering change on it?
The expertise in a relationship is amazing in terms of the
value it creates. The experience and knowledge really
protect them from global competition. I have looked at
suppliers in Asia and Mexico, and cant find anyone who
can make it for anything close to the price.
Valued suppliers are involved early on in new product
development. They are brought in as experts to suggest
solutions and to take cost out of the product right up
front.
Jack: We try to get the supplier in here up front. They are
the experts on stamping and forging. Our engineers know
what they want as far as design is concerned. But if you
can get the forgers or stampers here, have them sit down
with the engineers, and get the design right the first time,
look how much farther you are in the process of
development. We call it early supplier involvement. The
suppliers can take costs out of the product right up front
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because they know what their capabilities are, and they

share that with our engineers.
Several participants mention a strong trend towards
shifting more and more product development tasks onto
suppliers. Instead of communicating drawings and specifications to suppliers for execution, they now ask them to
bring in complete design solutions and take on project
management. This trend has opened up a whole set of
new opportunities for suppliers to add value based on their
design and testing expertise.
Scott: Our suppliers have full-time engineers in our tech
centers. They do the design, the drawings, the project
management work for certain commodities. Its a blackbox design. They supply us with a whole solution. Its
the same with testing. We certify the labs of our
suppliers. So they can bring us solutions instead of
ideas. We dont have to do the testing again to verify
their results. So, you minimize the amount of duplicate
testing that goes on.
In summary, supplier know-how represents a fourth
dimension of relationship value. Suppliers may hold a
specific expertise, which is not available within the customers organization. This dimension encompasses several
aspects. First, the suppliers extant knowledge of the supply
market provides an opportunity to present the customer with
new sourcing alternatives. Second, a supplier adds value in
assisting the manufacturer in the improvement of existing
productsboth in terms of functionality and costs. Finally,
a supplier may assist the customer in developing new
products.
4.5. Relationship value Dimension #5: time-to-market
Over the past decades, competitive advantage in manufacturing industries has shifted from low labor costs and
economies of scale to flexible manufacturing (Stalk, 1988).
Today, speed and time-to-market have become strategic
guidelines in designing and managing supply chains (Stalk
& Hout, 1990). Dells direct business model illustrates best
this trend toward shorter cycle times. The company carries
inventories of only 11 days on average and delivers its PCs
built-to-order within 5 6 days of lead-time (Magretta,
1998). Suppliers are treated as in-house partners. Inventory
levels and replenishment needs are shared in real time.
When new products are launched, suppliers station their
engineers in Dells plants to fix design flaws in real time.
Our interviews confirm the growing importance of timeto-market. Participants voice an increasing pressure on
manufacturers to develop products at a faster pace. New
products represent a growing portion of a companys
revenue base. The following passage from household appliances illustrates this trend:
Scott: I think what has changed in the US appliance
market in the last three years is that there are more new
products coming, while changes and product differ-
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entiation are very minor. Being able to make changes

quickly was always important, but it wasnt as important
in the past. Now we introduce more new products than
we ever have before. All of a sudden, those new products
have a significant impact on your revenue base. Being
able to do that quickly is a much bigger deal than before.
It has always been a factor, but it is more important now.
In summary, our study confirms that a suppliers ability

to reduce time-to-market represents a source of value
creation in buyer supplier relationships. Suppliers add
value through accelerating design work, developing prototypes faster than competitors, and speeding up the product
testing and validation process.
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 of
the design of a new model to getting the first vehicle off the
assembly line. Today, automobile companies have compressed cycle times to less than 18 months.
4.6. Relationship value Dimension #6: personal interaction
Frank: We build vehicles from the start of design to first

product off the line in as low as 18 months, where three
years ago, it took us close to 36 40 months to do that.
We are really trying to get cars to market much faster. We
are still not a leader in that area, but we try to make up as
much time as possible.
Manufacturers turn to their suppliers in different areas to
reduce overall cycle times. Speed of executing design work
for a customer is one area where supplier can add value:
Frank: Our global suppliers can get much faster turnaround in completing or changing designs. They take in a
requirement and send it to an off-shore facility where
they have much more of the day to work with it. If we
decide at 3:00 p.m. to do something, they can send it to a
new facility, and by the time you come back the next
morning you already get a result.
Speed also refers to developing prototypes faster. By
developing a prototype right to the customers specifications the first time, a supplier may improve cycle time
significantly.
Richard: You have to have instrument suppliers that are
quick at what they do. For example, last week, we
delivered two models to an instrument supplier, and they
turned around prototypes within four days. That is an
extreme, but typically what we are looking for are leadtimes of four to six weeks. Two years ago it would have
been twelve to sixteen weeks.
In addition, suppliers take on more and more testing and
validation tasks, and they perform these tasks faster than the
manufacturer. There is no need for retesting once the
manufacturer receives the product.
Frank: Suppliers add value through testing and validation. We have all kinds of validation requirements for our
parts whether it is bumper impact tests or sled tests for
the interior airbags. Suppliers take over more and more
of our validation, and they are able to do it a lot faster.
That helps us to improve our cycle times. Some of our
validation equipment is used 24 hours, 7 days a week. By
going to supplier facilities, we speed up the validation
process and get cost savings faster. This is not only for
new parts but also for cost improvements.
Though business relationships are established between

organizations, they are actually managed by individuals. In
fact, people make a relationship work or fail (Wilson &
Jantrania, 1995). Personal relationships are part of the
relational exchange, and buyers consider personal relationships as one important aspect of purchasing (Dwyer, 1993;
Dwyer, Schurr, & Oh, 1987; Dwyer & Tanner, 2002).
The participants in our study differ in the way they view
benefits accruing from personal interaction in a supplier
relationship. On the one hand, certain purchasing managers
hold the development of relationships at an individual level
in high regard and devote resources to building a rapport
with suppliers. Jeffs interview illustrates this stance:
Jeff: Every year we bring suppliers to a football game.
We focus on those suppliers who save us money, have
good quality, and we just like overall. It develops the
social relationship and gives us an opportunity to talk
off-line about things that are not necessarily about work.
It allows us to get to know these people better. I
specifically hold the social relationship in high regard as
one of the important factors. Do you really want to call
somebody who is going to yell at you or who has oneword answers and never returns phone calls? I have such
a good relationship with this supplier that we dont beat
around the bush. I just tell them the way it is, they
understand, and they fix it. That is really something good
to have. It is valuable.
The development of interpersonal ties leads to a number
of benefits. Communication between both parties is enhanced. If problems occur, they are more easily addressed.
Each partners objectives in the relationship are better
understood, which provide both parties with an opportunity
to expand the relationship as a whole.
Jeff: When I first came to [company], the person who I
took the position over was not well liked by the supplier.
They voiced their opinion as such. I changed the way we
work with them. When dealing with these people I look
at them as more than just a tool. I look at them as a
person. To me it is very important. If you dont have that I
dont think you can function well in the industry. I think it
[the relationship] grew more after I came on board,
because of the relationship that I developed with them. I
think they opened up and understood what they need to
do to move the relationship ahead. Im not so sure they
saw us as a long-standing customer before. Our relationship changed that, and I see this supplier developing.
When comparing the working relationship with two

suppliers of electrical motors, Mary mentions that one
company is much easier to work with than the other. This
considerably slows down the information process.
Mary: One company is much easier, much simpler, to do
business with than the otherjust because they give us
their names and e-mail addresses. The quality people
know the quality managers, they can call them up and
talk to them. All of those lines are very open. The other
company, well, you have to do all of those things through
the salesperson. It is much more difficult to get the
answers, because now my quality person is calling me
asking a detailed question. And now I have to call the
salesperson and give him a detailed question. And he
goes and talks to his people who ask a question that
neither one of us know an answer to. This is very
important to those of us who have to deal with a supplier
on a day-to-day basis.
Personal interactions should be developed at all levels of
the organizations, from the sales representative to the
suppliers president.
Richard: One of the things that are of value is that you
have the presidents of these companies show their face
here. We like the comfort of having the president here
and knowing what is going on. I think that shows that
you can call them. I can call the president of a company
and get him to shake the stick over there. Its the name,
the face: You can count on me if you need to use the
silver bullet to get something done. I think that is very
important. Its a comfort level.
The absence of good personal interaction may endanger
the overall relationship. Not having a good working relationship is considered counterproductive:
Denice: I think the personal issues are important, at least
for our company, because there is such a close interaction
between their folks and ours. If you have people that for
one reason or another do not get along, it strains the
relationship and is counterproductive. So, I believe that
the value of the interpersonal skills is quite high.
Jack describes a situation of conflict in a supplier
relationship. The suppliers salesperson avoids contacting
purchasing wherever possible, and often directly interacts
with the customers engineers to get them to specify the
suppliers product on blueprints. As a consequence, purchasing continuously searches for alternatives to replace the
supplier.
Jack: This supplier has a good quality product, but when
you look at the purchasing side, delivery and their
pricing, . . . [shakes his head]. When the salesman comes
in here I dont want to spend time with him, because he
just gives me a song and dance, and I usually end up
getting into an argument with him. So when he comes in,
he doesnt see me, he just goes up to engineering and
gets his part on the blueprint, so that we have to buy it.
687
Engineering says Well, [the supplier] gave us some nuts,

and we qualified the program on it. You have to go to
them. If they know that they are the only one on there,
then we get screwed in the long run because their prices
are going to be out of this world. I try to build a better
relationship. It hasnt been good for me because I have
been burnt too many times with those guys, and they
dont seem to be changing their ways.
A second set of participants expresses an opposite view
of how social interactions influence a manufacturer supplier relationship. These purchasing managers refer to the
manufacturers internal policies and rules of conduct with
respect to handling gratuities.
Richard: As a buyer, you really have to be careful of how
you are perceived within the department and the
organization. If you are walking out of the front door
every day to the suppliers car to get lunch that is an
issue. We dont mind the occasional. But for the most
part we have a very low tolerance level for it. The
individuals that work for us and for the suppliers are
well-paid individuals. We dont need to take advantage
of the other stuff.
Beyond ethical considerations in how to handle personal
interactions in a manufacturer supplier relationship, some
participants suggest that their organizations have implemented procedures limiting the role played by interpersonal
relationships.
Frank: From my experience, it doesnt make a whole lot
of difference who is on the other side. I think [our VicePresident of Purchasing] doesnt want decisions to be
made because of how you feel about certain individuals
or suppliers. When he came on board 9 or 10 years ago,
his big thing was to bring the sourcing decisions to a
central table where everyone has a chance to see what is
going on. That took away a lot of power from buyers
who were in their own region or division making their
sourcing decisions based on who they knew. The central
sourcing took a lot of that social element out of the
equation. All of a sudden, we started comparing notes on
the suppliers, and that started the development of global
quality data that we have on suppliers. (. . .) This is also
the reason why we support electronic bidding. In the
process, we will send out quotes, and the bids come back
in. Typically, we will do a technical review with the
supplier, and we will have our quality engineer there to
make sure they fully understand all the performance
requirements of the quote. Once we feel that the
suppliers proposal is good from a technical standpoint,
we start bidding with them. In some cases, there is some
leeway for the buyers to push a sourcing decision into
one direction if they have a good relationship with a
supplier and know the supplier will do a good job. But
from our standpoint, we are not getting the best result if
we are steering.
688
In summary, the responses from the participants reflect a

strong diversity of opinions held about the potential of value
creation through personal interaction. For those participants
who view personal relationships as a value driver, we can
identify improved communication, more effective and efficient problem resolution, and a better understanding of each
partners goals in the relationship as most important benefits. These benefits contribute to growing the relationship as
a whole.
4.7. Relationship value Dimension #7: price
In their research on customer firm costs in buyer
supplier relationships, Cannon and Homburg (2001) mention direct product costs, that is, the actual price charged by
the supplier for the main product sold, as the sacrifice most
easily identified by purchasing managers.
The participants in our study confirm the role of direct
product costs as an important aspect in evaluating relationship costs. Respondents state different reference points
when judging price levels. Three purchasing managers
expect their suppliers to align themselves with the lowest
possible price in the market. Four participants benchmark
suppliers against competition, to obtain a fair market
price or an average market price. Finally, two participants expect their suppliers to charge a reasonable
price.
Lowest priceFrank: We found in electronic bidding that
suppliers will keep going until they are totally exhausted.
If a supplier submits any new quote within the last 3
minutes of an auction, there is an additional 3 minutes
added to it. So as long as somebody continues to submit
a bid, the auction will keep going. If in the last three
minutes nobody is bidding at all, then you know you
have gotten to the bottom.
Market priceDenice: We make certain that we have
market pricing, that is, what we pay is reasonable in
terms of what the market can bring to us. If our supplier
is not best-in-class in terms of pricing, we negotiate with
them to get closer to the market price.
Reasonable priceJerry: We dont want any supplier
that loses money but we want them to be tough too. We
want them to give us the best cost as they can at the
margin they can live with. They need to make money as
well as we do.
When asked, only two of the nine participating companies agreed that they accept a suppliers higher price in
exchange for additional benefits received in a valued relationship. At first, this low number may appear counterintuitive. The customer value literature suggests that a customer
should be willing to pay a higher price for a higher-quality
product (Zeithaml, 1988). Similarly, it could be argued that
a suppliers investment in a close collaborative business
relationship should provide the supplier with an opportunity
to ask for higher prices than competition. Only one of our

interviews illustrates such a perspective:
Richard: If you look at the overall price for the kit
[orthopedic implant and surgical instruments], the instruments are not the key cost factor. For a new product, we
need to meet the market launch and rely on the supplier
to deliver the product. Over time, as volumes go down, it
wouldnt be economical to stay with more expensive
suppliers. There are smaller companies that will take on
those instruments for a cheaper price. When you look at
moving very complex instruments from one supplier to
another for the sake of saving a few dollars, there really
have to be significant savings to outweigh the potential
pitfalls of a product not meeting specifications or failing
in the field.
When further probing into how managers view direct
product costs, we found that the majority of participating
companies faces a strong pressure to reduce costs.
Jack: We have tremendous pressure to drive down costs,
and we are just getting hammered year after year for
price reductions. Our goal is to get 4 6% productivity
every year out of the contract. We have been driving
prices down year over year with these suppliers. The
train is coming to a slow down. You cant get a whole 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
suppliers say This is it. We have to give you a price
increase. Raw materials are going up because of the
embargo that is going on with imported steel. So once
they do that, I have to say Ok, what can we do down in
Mexico?
In response to continuous price pressures, suppliers are
expected to commit to annual price reductions within longterm contracts. They need to continuously identify new
ways to decrease costs and to pass savings on to the
customers. The following passages from Scotts interview
illustrates this customer expectation:
Scott: The prices for appliances continuously go down. It
is a very cost sensitive, aggressive business. Our best
partners understand that. They dont fight it. Their
business is designed around it, working with us to take
cost out of their business and our business. So they are
very aggressive when it comes to doing cost reduction
projects. And that is an absolute requirement to be a good
supplier with our company.
The manufacturers typically ask for price concessions
between 4% and 8% annually. In turn, they are prepared to
increase purchasing volumes with suppliers.
Denice: We pull similar components together and then
submit that entire package out to 4 or 5 suppliers. It gives
them the opportunity to not just look at an individual part
but at a piece of our overall spend, and that increases the
amount of business they can have with us. This in turn
689
reduces the cost for us. I guess it to be about an 8%

reduction a year. And we have done that now three years
in a row. Overall, in the three years, we have reduced
material costs by about 25%.
force them to come back to the negotiating table. We

need to keep the pressure on them. If they know that they
are the only game in town, we will get a price increase
every year.
A collaborative relationship may protect a supplier from

competition. If the company is at a price disadvantage, the
manufacturer may work with the supplier to reach a price
that is considered to be competitive.
In summary, our interviews confirm that manufacturers

focus above all on direct product costs. A suppliers
products may be priced below, above, or at competition.
Some participants expect a reasonable price or a market
average. All manufacturers expect their suppliers to commit
to annual price decreases. They assist suppliers in driving
down prices through joint cost reduction programs. However, switching costs may significantly slow down the
manufacturers ability to gain price savings over time.
Scott: When you talk about costs in a relationship, there

are things that you probably do with a partner that you
may not do with a non-strategic supplier. If your supplier
is at a competitive price disadvantage for a motor, you
may give him time to recover, time to get to a
competitive price as part of your partnership. Instead 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 bring on a
new supplier. There is an opportunity cost associated
with the relationship.
Finally, switching costs represent an important factor
when evaluating a suppliers direct product costs. The
following passages from our interview in the aircraft industry illustrate the importance of barriers to entry:
Shawn: You cant change to another supplier because of
the tooling. We invest up front, and it is up to them to
maintain those dyes and re-sink them. They pay for that.
Thats why they say You have exclusive use of the dyes,
but you cant pull the dyes out and take them to
somebody else. (. . .) Then, there is another barrier. You
can have tooling made somewhere else, and it would cost
about 50,000 dollars. But the biggest barrier is that it
would cost us well over a million dollars for a requalification of a new supplier. Once you are in, you are
in for life unless you screw up big time. If you want to
change forgings suppliers you have to go back and get
our customers approval. The customer would say Well,
ok, but you need to run me qualification tests. So it is a
big cost associated with making a change like that.
Certain suppliers take advantage of such a situation.
They are aware that customers would endure significant
switching costs if they wanted to change to another supplier.
These companies also take advantage of emergency deliveries to ask for considerable price premiums. As a response,
the company continuously searches for alternatives.
Jack: We have suppliers that we ask to work on a
weekend, and they wont come in with any premium.
They will say You guys are good customers, we will
support you. It is a unique situation. But guys like
[supplier] will take advantage of it: Oh, you want us to
work this weekend? That is another $10,000 (. . .) We try
to get another supplier on board to take this suppliers
place. It will take a while to do it because we need a lot
of testing. But we know there are other suppliers that can
be very competitive with [supplier] pricing. That will
4.8. Relationship value Dimension #8: process costs

Researchers have argued that firms collaborate in relationships to achieve improvements in overall operations, not
just in price reductions. For example, Cannon and Homburg
(2001) mention acquisition costs, that is, costs customers
incur in acquiring and storing products, and operations
costs, that is, costs inherent in the customer firms primary
business.
Our participants mention several directions of value
creation through cost reductions. In the category of acquisition costs, they discuss transportation costs, inventory
management costs, order-handling costs, and costs related
to incoming inspections.
Transportation costs. One company mentions transportation costs as a differentiator among suppliers. However,
most respondents request that suppliers take on logistics
costs and quote prices Free on Board (FOB), with little
leeway for differentiation.
Inventory management represents an second opportunity
for cost reductions. Financial benefits accruing from having
the supplier manage the customers inventories are reduced
inventories, less working capital needed by the manufacturer, and improved cash flow. One company mentions its
stocking relationship with a supplier:
Denice: They rent space in our facilities and bring the
stock of the products into that area. Rather than shipping
to us, they deliver the product to our production floor
upon demand. There are obviously some very big
financial advantages to having a stocking relationship.
We have reduced our inventory, which increases our
working capital. And in terms of cash flow thats a big
advantage.
Order-handling further contributes to reducing relationship costs. Customers need to allocate less time and dedicate
fewer personnel to the ordering process. One company
mentions that it heavily relies on the supplier for orderhandling given the limited number of buyers in the purchasing department:
Jerry: Our organization is very flat. We cant spend a lot
of time doing the buying from this supplier and
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everything else too that goes along with it. This supplier
has been servicing us for about 30 years. He comes in
here once a week, takes an inventory of his products and
then drops the order off to the buyer. The buyer reviews
it to make sure it is in the levels that we established and
places the order. The supplier handles the orders for us,
within the parameters that we have set for him. He saves
us tons of time. Its a great asset because my buyer
doesnt have to spend that time reviewing reports or
going out on the floor to see whats what. Saves us a lot
of time.
Several manufacturers have implemented automatic replenishment programs or KANBAN systems to standardize
order processes.
Incoming inspections. A fourth vector of reduced acquisition costs are incoming inspections. Several manufacturers
indicate that they have abandoned incoming inspections as
their suppliers fulfil high quality standard for incoming
products:
John: We track quality each month through our NoIncoming-Verification (NIV) program. If a suppliers
product meets our quality criteria so many months, we
dont inspect the product anymore here. As soon as it
comes in the door it goes to the assembly line.
Operation costs. The participants in the present study
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 differences in
product yields in the transformation process.
Regarding the overall distinction of the three cost categories, all but one manufacturer find it difficult to separate
direct product costs, acquisition costs, and operation costs.
The following passage illustrates the difficulties purchasers
have in making such a distinction.
John: We dont have anything that says the direct cost is
this, the acquisition cost is this, or the operations cost is
that. We dont have a monitoring system to cover that.
Determining the direct cost is simple. I know each unit
price of the circuit board. We compare this suppliers unit
cost to someone else when we first design a new
program. Thereafter, we monitor a suppliers quality and
delivery performance. If we have zero PPM quality
problems and a 100% on-time delivery, then our cost of
using that product is minimum. We know that the cost is
higher for suppliers that have continuous problems with
those measurements. So if it gets to the point where we
spend more time than it is worth, we will re-source that
product with another company. We are aware of and
minimize those additional costs with a number of
different tools, but I cant sit here and distinguish them.
The difficulties managers find in differentiating these
cost elements refer to the absence of adequate information
systems relating costs to specific parts purchased. As an
illustration, one company mentions that its accounting

department tried to implement such a tracking system for
several years. However, the project was finally abandoned,
as it was considered too complex.
Mary: We focus on purchasing prices for parts. Theyre
all quoted delivered to our factory so the whole logistics
costs are easy to consider in the price. We dont have a
good way of then saying It costs us this much more to
inspect it, this much more for order handling. We dont
have any cost matrix. We arent tracking it. We have
played around, trying to use our supplier rating program
to capture some of that. Basically we wanted to say If
they have very poor quality here, then there is a cost to us
there. But how do we take that supplier rating, which we
know is poor, and put a dollar value on it and then add it
to the cost of product? Its too complicated.
In summary, suppliers find multiple ways of adding value
by taking costs out of a business relationship. Major areas
for reductions in acquisition cost are inventory costs, orderhandling costs, and costs for incoming inspections. Among
operation costs are downtime costs, costs for tooling,
warranty costs, and costs related to differences in product
yields in the transformation process. Overall, the companies
find it difficult to clearly distinguish between direct product
costs, acquisition costs, and operation costs due to the lack
of adequate measurement systems.
5. Implications
The present study has a number of implications for
managers and researchers alike. From a customer perspective, our findings allow manufacturers to assess how a
supplier adds value in a relationship. Drawing on previous
approaches of profiling customer value perceptions of
physical products (Woodruff & Gardial, 1996), Fig. 2
illustrates how a manager could profile an existing supplier relationship and benchmark it against an alternative
supplier.
In this fictive example, Suppliers A and B are compared
against each other. Alternatively, a specific supplier profile
may be compared with an expected or ideal profile. The
suppliers are first evaluated on each value-creating dimension. If needed, each dimension may be further broken
down into its specific subcategories (as described in Fig. 1)
using scores within a range of 1 (very weak) to 7 (very
strong). Then, the suppliers scores on each dimension are
computed and plotted on the diagram in Fig. 2.
The figure shows that Supplier A scores high on
quality, service support, and delivery. In addition, the
company offers a low purchasing price, that is, Supplier
A scores high on this dimension from the customers
perspective. In turn, the company does not perform well
on time-to-market, supplier know-how, and personal interaction. In addition, the purchasing manager perceives that
Fig. 2. Relationship value profiles.
the company does not really add value by continually

driving down other costs in the relationship (low score on
process costs).
Supplier B has a very different profile. The company
scores well on the value-adding dimensions of product
quality, service support, delivery, time-to-market, supplier
know-how, and personal interaction. This supplier scores
low on price, that is, the company asks for a higher price
than competition. This is partly offset by the companys
ability to assist customers in improving process costs
through inventory management and order-handling (high
score on process costs).
As a consequence, the purchasing manager may conclude
that both suppliers have very different, yet complementary,
value-creating capabilities. Supplier B may have an ideal
profile for developing a new product, that is, sourcing an
electrical motor for a new household appliance. In turn,
when it comes to sourcing a motor for an existing mature
product, Supplier A might be better adapted.
To take the assessment a step further, one may attribute
weights to the dimensions in Fig. 2. By attributing a relative
importance to each value driver, an overall value score may
be calculated for any given supplier relationship. In our
example, the multiplication of relative weights and scores
obtained on each value dimension results in an overall score
of 4.2 for Supplier A and 5.25 for Supplier B. On this basis,
Supplier B would be considered as delivering more value
than Supplier A.
Our findings also offer insights for vendors. In many
markets, suppliers face increased competition, both domestically and from abroad. Consequently, managers ask for
ways to avoid a strong trend towards commoditization in
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 themselves 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 studys findings provide valuable insights for
modeling relationship value. To capture the various facets of
the construct, empirical research should rely on multidimensional scales of relationship value in business markets rather
than overall measures of the construct.
Diamantopoulos and Winklhofer (2001) argue that reflective specifications of latent variables often mistakenly
prevail in the marketing literature. In reflective specifications, higher-order constructs are assumed to cause their
dimensions rather than being caused by them. Consequently, dimensions are viewed as strongly correlated and
interchangeable facets of the focal construct (Bollen &
Lennox, 1991). In turn, formative specifications view a
higher-order construct as being caused by its dimensions.
From a formative perspective, the higher-order construct is
defined by its dimensions, which need not be highly
correlated with each other. The choice between a formative
and a reflective specification should primarily be based on
theoretical considerations (Diamantopoulos & Winklhofer,
2001).
In our context, previous research on relationship value
does not provide any guidance as to how the different
dimensions should be consolidated. Researchers have
conceptualized relationship value as a reflective construct
without justifying their approach (Lapierre, 2000). However, the findings of our grounded theory study suggest a
formative measurement approach. Indeed, the value
dimensions need not be highly correlated with each other.
For example, a specific buyer seller relationship may
well score high on product quality (Dimension 1) but
low on personal interaction (Dimension 6). Such situations are described repeatedly by participants in our
study. Consequently, from a methodological standpoint,
a formative measurement approach should be used, rather
than reflective measures when modeling relationship
value.
692
6. Limitations
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
selected for the purpose of this study is not representative of
the population of manufacturing companies. Only quantitative approaches using large sample sizes could provide
generalizations across manufacturing industries.
Second, our research focused on manufacturer supplier
relationships. Dimensions pertaining to services industries
were not addressed in the present research. It is expected
that the particularities of service industries warrant the
development of a different set of value-creating dimensions.
Third, relationship benefits and sacrifices were only
studied within the manufacturer supplier dyad. Value drivers within the larger network of relationships were not
addressed.
Finally, we adopted a static view of relationship value
capturing a snapshot of customers perceptions of relationships with their suppliers at a given point of time.
Researchers have suggested ways of measuring benefits
and sacrifices over the lifetime of a business relationship
and calculating its net present value (Hogan 2001). However, to the best of our knowledge, no empirical research has
yet operationalized this issue.
7. Directions for further research

The present research provides opportunities for further
research in understanding value creation in buyer supplier
relationships. First, it would be interesting to develop
multidimensional measurement scales based on the relationship value dimensions identified in this study. Empirical
research based on a cross-sectional sample of manufacturing
industries could provide the possibility to test, validate, and
refine the scales.
Second, it would be interesting to integrate relationship
value in prevailing models of relationship marketing (Morgan & Hunt, 1994). This would allow researchers to understand how the construct affects the way we model business
relationships. For example, it would be interesting to understand how value relates to other key relationship variables
such as commitment, trust, satisfaction, and loyalty.
Finally, the development of managerial tools based on
the approach presented in our study would provide managers with a simple, yet effective, tool for assessing the value
created in buyer seller relationships.
The understanding of how supplier relationships create
value and competitive advantages for customers is of
increasing importance in many business markets. Yet, few
researchers have investigated the construct in business-tobusiness relationships and suggested psychometrically
sound measures of the concept. We hope that this study
will stimulate further empirical research on relationship
value and its relation to other key relationship marketing

building blocks.
Acknowledgements
The author would like to thank Joe Cannon, Andreas
Eggert, John Gaski, Tom Reynolds, John Weber, and the
two anonymous reviewers for their comments on an earlier
draft of the manuscript. In addition, the author would like
to thank Joe Guiltinan and the Department of Marketing at
the University of Notre Dame for their support in this
project.
Finally, the author would like to acknowledge Chris
Cronin, MBA Candidate and research assistant, for his
valuable contribution to this project.
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Wolfgang Ulaga is a Visiting Associate Professor of Marketing at the

Mendoza College of Business, University of Notre Dame. He also is
Associate Professor of Marketing at ESCP-EAP in Paris, France. His
research interests focus on how firms create, deliver, and measure customer
value in business markets.

Capturing Value Creation in Business Relationships: A Customer Perspective

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Industrial Marketing Management 32 (2003) 677 693

Capturing value creation in business relationships: A customer perspective

through improved customer interactions (Vandenbosch &

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

ship benefits and sacrifices. Elsewhere, Gronroos (1997)

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

Anderson et al. (1993);

economic benefits, technical benefits,

economic benefits, strategic benefits,

Moller and Torronen

core solution, additional services

these dimensions could be combined to form an overall

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

in the Midwest of the United States. Companies were

Respondents were further asked to describe in detail the

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

Frank: Business Manager

sales: $177 billion,

interior for a specific vehicle;

sales: $11 billion,

electric motors; two main suppliers,

sales: $6.2 billion (division),

pins; one major supplier (95%)

aircraft landing systems

sales: $9.7 billion (division),

aluminum forgings for aircraft wheels;

sales: $1.2 billion,

surgical instruments; two major supplier,

sales: $458 million,

circuit boards, one major supplier (80%),

sales: $110 million,

springs; one sole supplier

sales: $82 million,

electric motors; two main suppliers

sales: $75 million,

standard electronic components;

3.2.7. Assessment of trustworthiness

value drivers, feedback from study participants was gathered

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

Fig. 1. Relationship value drivers.

4.1. Relationship value Dimension #1: product quality

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

Most of the companies in our study have implemented

study mention a number of additional services. Suppliers

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

not meeting their schedules in a timely fashion, that

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

Suppliers may hold a specific technical expertise, which

because they know what their capabilities are, and they

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

entiation are very minor. Being able to make changes

In summary, our study confirms that a suppliers ability

As a consequence, companies devote significant efforts

4.6. Relationship value Dimension #6: personal interaction

Frank: We build vehicles from the start of design to first

Though business relationships are established between

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

When comparing the working relationship with two

Engineering says Well, [the supplier] gave us some nuts,

W. Ulaga / Industrial Marketing Management 32 (2003) 677693

In summary, the responses from the participants reflect a

to ask for higher prices than competition. Only one of our