Industrial Management & Data Systems

Assessing supplier performances under partnership in project-type procurement

Liang-Chieh (Victor) Cheng Edward E. Carrillo
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Liang-Chieh (Victor) Cheng Edward E. Carrillo, (2012),"Assessing supplier performances under partnership
in project-type procurement", Industrial Management & Data Systems, Vol. 112 Iss 2 pp. 290 - 312
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IMDS
112,2
290
Received 17 March 2011
Revised 17 August 2011
Accepted 17 August 2011
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Industrial Management & Data
Systems
Vol. 112 No. 2, 2012
pp. 290-312
q Emerald Group Publishing Limited
0263-5577
DOI 10.1108/02635571211204308
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0263-5577.htm
Assessing supplier performances
under partnership in project-type
procurement
Liang-Chieh (Victor) Cheng
Information & Logistics Technology Department, College of Technology,
University of Houston, Houston, Texas, USA, and
Edward E. Carrillo
WorleyParsons – Resources & Energy, Bellaire, Texas, USA
Abstract
Purpose – The purpose of this paper is to investigate the effects of a commercial partnership in a
project-type supply chain. The research focuses on the performance of suppliers who develop a
partnering mechanism for procurement of complex manufacturing projects. In total, four supply chain
metrics are evaluated: project scope change, ratio of actual-to-estimated project costs, gross profit
margin, and delay in deliverable shipments. Hypotheses are formulated to contrast partnerships and
arms-length relationships for industrial procurement. Statistical results support the conclusion that
supplier performances improve under partnership.
Design/methodology/approach – Four supply chain metrics were generated through review of
literature and in-depth field study. The authors utilized the supply chain management, project
management, and principal-agent theory literature to develop hypotheses to examine effects of
instituting a partnership agreement. A case study approach was employed to collect financial and
operational data from 167 projects among a manufacturing supplier and a group of customers that
purchase industrial analyzer systems. Statistical techniques were employed for hypothesis testing.
Findings – The findings from the authors’ empirical work support the prediction in partnership
literature that suppliers’ operational and financial performances improve after they and
manufacturing customers jointly implement partnerships. A supplementary finding also suggests
that a manufacturer should develop partnering mechanisms with suppliers to achieve higher
performance for both the individual firms and the entire supply chain.
Research limitations/implications – This study, like other “before and after” analyses,
encounters limitations on causality. Advanced techniques, e.g. cause-effect investigation with richer
data, are hence necessary to validate the causal relationships between performance metrics and their
drivers. This study focuses only on the supplier’s side of the supply chain and its partnership in a
specific industrial setting. Future research may consider studying the joint performance by
supplier-customer dyads in commercial partnerships with variations of partnering agreements.
Practical implications – Partnerships motivate trading partners to engage in higher level of
coordination. Transactional hazards can be reduced and performance may improve under the
partnering mechanism. The manufacturer may design the procurement partnership as a collaborative
mechanism, thus helping a partnering supplier and itself to obtain increased mutual gains.
Originality/value – The paper provides detailed information of a unique case study of the
partnership in a project-type supply chain, which is relatively new in the literature. Research streams
on supply chain management, project management, and principal-agent theory are integrated to
evaluate supplier performance. Empirical results confirm partnership impacts on suppliers’ business
performance.
Keywords Supply chain management, Project management, Procurement, Production management
Paper type Research paper
 Introduction Assessing
In the era of networked economies, partnership is a subject intimately related to supply supplier
chain management. The partnership agreement is a coordination mechanism
governing the supply chain relationship (McCutcheon and Stuart, 2000). Operational performances
partnerships encompass a wide variety of value-creation processes, e.g. research and
development, procurement, production, marketing, investment, employment, logistics,
etc. (Reed and Reed, 2009). The crux of a successful partnership is the joint profitability 291
among the members as opposed to individual gains. A management challenge is to
reconcile supply chain members’ conflicts of interests while creating incentive to
achieve performance among the respective partners (Ellram, 1995).
Despite the prevalence of partnership, the conceptualization on partnership varies
from study to study. Partnership can be implemented in a two-tier or a three-tier
distribution model, and different industries and cultures treat it differently. As such, it is
difficult to provide a “one-size-fits-all” definition for partnership broadly across all
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parameters ( Johnstone et al., 2009; Reed and Reed, 2009). We hereby develop a working
definition of commercial partnership to more effectively probe our study subject.
A partnership is defined as a long-term relational mechanism between a industrial
supplier and its customer, which replaces open-market mechanism and provides
financial and operational incentive for partnering entities to pursue performances
individually and jointly (Chang, 2008; Whipple and Roh, 2010; Zhang, 2009).
The study context of this paper is the project-type, manufacturing supply chain.
Project businesses are discrete and the management environment may vary across
projects. Project environments demonstrate the “antithesis” of partnership
development, which aimed at long-term, stable collaboration (Beach et al., 2005). For
instance, in the construction industry, it is difficult to implement partnerships at the
downstream stage in a development project because of the sporadic transactions.
Industrial managers have adopted on supply chain management and project
management in controlling complex systems (Foster et al., 2011). Project members
across industrial supply chains can form partnerships to obtain scope economies and
complement one another’s competences (e.g. Barnes & Noble partnering with Starbucks
to achieve functional integration). Supply chain management hence provides a new
systematic perspective to reconcile the incompatible aspects among project
management and partnership mechanisms (Hicks and McGovern, 2009).
The purpose of this paper is to assess the effects of the partnership in a project
environment. Our research scope focuses on the performance of suppliers who develop
a partnering mechanism for procurement of manufacturing projects. Compared to the
partnership literature on the benefits for a customer base, studies evaluating the
impacts of partnership on suppliers are few and sporadic in selective industries (Field
and Meile, 2008). We intend to extend the partnership literature by addressing the
following research challenges:
.
Identification of project-based performance metrics under partnership.
.
A comparative evaluation of the supplier’s performance under partnership and
arms-length relationships.

The basis of the paper is the study of a partnership between a global supplier and
a Fortune 500 customer. We collected a unique dataset under the case partnership
through a multi-year case study in an industrial procurement context. This paper
 IMDS contributes to the partnership literature in the following aspects: we provide detailed
112,2 information of the partnership in a project-type supply chain, which is relatively new in
the literature. Research streams on supply chain management, project management, and
principal-agent theory are integrated to evaluate supplier performances. Empirical
results confirm partnership impacts on suppliers’ performances.
For the remaining content of the paper, the second section reviews literature on
292 partnership and its impacts on firm performance. We develop a set of parameters
through literature review. A set of hypotheses is then developed. In the fourth section,
we present comparative tests relative to supplier performances under partnership and
arms-length relationships. The fifth section discusses managerial implications of the
findings. The final section provides summary and concluding remarks.

Literature review
Literature on partnerships applied in supply chain is first reviewed. We then discuss project
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management literature on implementing partnership in a project-type supply chain. We in

turn discuss recent empirical studies applying principal-agent theory to examine
partnership issues. Finally, four performance metrics and related hypotheses are developed.

Partnership applications in the supply chain

For supply chain management, partnership’s coordination mechanisms are aimed at
integrating value creation processes in R&D, production, logistics, and services. They
exist in the form of information sharing, collaborative operations, joint ownership of
investment, among others (Andonova, 2010), and these coordination mechanisms
resemble features of vertical integration. Meanwhile, partnership is not permanent and
can be terminated as a result of amicable disbandment, business frictions, poor
performance, and competition. These features resemble market mechanisms (Ellram,
1995). Large-scale examples include corporate-university or government-institute
partnerships that can reach an international scale.
There are three levels of partnering integration in supply chains. The most
integrative type has joint development activities (Jap and Anderson, 2003). Members of
this type of partnership together create a new entity or mutually exchange ownerships.
A lesser form of integration is strategic alliance where partners implement contractual
agreements to achieve operational effectiveness (Gulati and Higgins, 2003). Each
partnering entity remains autonomous but the business exchanges are cooperative and
collaborative. Finally, the most flexible format is the de facto partnership that may not
have a tangible contractual form ( Johnstone et al., 2009).

Implementing partnership in project-type supply chains

For companies with project-oriented operations (e.g. construction and R&D firms), both
partnering mechanisms and project management perspectives have been used to facilitate
practice in managing project-type supply chain (Titus and Bröchner, 2005). In essence,
coordination is the core issue of both partnership and project management to ensure
performance in project execution (Xue et al., 2007). This converging trend indicates that
project management has moved away from the traditional control of independent cost
centers toward a systematic approach of supply chain collaboration (Wei et al., 2007).
Improving project effectiveness is of interest to supply chain partners. Value creation is
achieved by balancing the needs of not only the project but also the partners (Bygballe and
 Jahre, 2009). Long-term partnership stimulates coordination and improves production and Assessing
assembly productivity of consecutive projects. These gains will in turn improve projects’ supplier
total costs and enhance delivery performance (Errasti et al., 2009).
Project management techniques and supply chain management concepts have been performances
combined to perform equipment procurement in engineering and construction projects
for partnering firms to achieve better time management (Yeo and Ning, 2006). As
project performances improve, financial incentives enhance partners’ participation, 293
ultimately reconciling the distinctions of project environments and partnership
requirements (Pryke, 2005).

Principal-agent theory on partnering mechanism in supply chain

Principal-agent theory provides critical insights to assess partnership performances.
The theory originally studied intra-organizational issues associated with the
ubiquitous principal-agent (namely, employer-employee) problems in organizations.
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In her well-known theory-building article, Eisenhardt (1989a) opined that due to

unequal risks, information asymmetry, and unbalanced cost and benefit allocated
between principal and agent, the two parties must develop contractual mechanisms to
motivate performance and mitigate opportunism.
Principal-agent theory has been extended to inter-organizational settings to assess
buyer-supplier relationships (Whipple and Roh, 2010). Generally, one supply chain
member serving as the principal delegates value-added processes to another member,
the agent. The agent needs to account costs and transactional risks, while the benefits
of performing supply chain tasks are uncertain. To motivate the agent to accomplish
high performance, the principal needs to design a mechanism that provide the agent
with incentives (Manatsa and McLaren, 2008).
Partnership serves as a mechanism to reduce risk and induce benefits in the
principal-agent dyad (Ozcan and Eisenhardt, 2009; Pongsiri, 2004). Partnership may
facilitate communication and coordination to ensure a continual working/business
relationship. Additionally, the partnering mechanism may foster cooperation and
reduce transactional hazards between the trading parties, hence minimize transaction
costs (Pongsiri, 2004). These gains may serve as agents’ incentives to perform better.

Impacts of partnerships on supplier performance

Table I presents a summary of highlights of empirical research concerning partnership
impacts on supplier performance. It can be observed that a variety of research methods
have been applied to study the partnership phenomenon. Empirical studies on
partnerships, however, are limited to a number of industries. The majority of empirical
research utilized perceptual observation rather than objective data. Papers driven by
the principal-agency theory are primarily relative to partnerships associated with
public-private sectors. Finally, no research simultaneously evaluated impacts by
partnership and other coordination mechanisms, particularly the open market.

Performance metrics for partnership assessment

Performance metrics are necessary to manage a project-type partnership and monitor
individual members’ performances (Agus and Hassan, 2008). Four performance metrics
for hypotheses development are examined and the operational definition of each metric
is as follows:
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294
112,2
IMDS

Table I.

supplier performance
Empirical research on
partnership impacts on
Author
and
Publication Partnership Theory Highlights on impacts of
Year Industry category applied Nationality Data type Methods partnership

Andonova Governments, Public- Principal- Multiple Archival Case studies, content analysis Partnership programs establish
(2010) international private agent theory nations new niches of environmental
organizations governance, particularly around
climate-change related
technology diffusion
Agus and Non-food Commercial Supply Malaysia Perceptual Survey, correlation analysis, Strategic supplier partnership
Hassan manufacturing chain cluster analysis, and practice and implementation
(2008) partnership structural equation modeling have significant associations
with product quality
performance and financial
performance
Duffy and Food retailers Commercial Structure- Great Perceptual Survey, discriminant Co-operative, long-term
Fearne and fresh conduct- Britain analysis, regression analysis partnerships positively affect
(2004) produce performance financial performance of
suppliers suppliers
Field and Financial Commercial Supply USA Perceptual Regression analysis and Better supplier relations are
Meile services chain correlation analysis associated with buyer
(2008) relationship satisfaction with overall supplier
performance
(continued)
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Author
and
Publication Partnership Theory Highlights on impacts of
Year Industry category applied Nationality Data type Methods partnership

Lawson Manufacturing Commercial Social UK Perceptual Internet-based survey, Social capital, as reflected in
et al. (2008) capital structural equation modeling managerial communication and
theory technical exchanges, is
positively related to buyer
performance improvements
Lee and Apparel Commercial Various USA Perceptual Survey, t-tests, correlation A high level of SCM activity
Kincade manufacturing logistics analysis, ANOVA, Tukey implementation is closely related
(2003) theories tests with the higher delivery
performance of fabric suppliers
which have partnership-like
relationship
Ozcan and Wireless Commercial Principal USA Perceptual Case studies, e-mails, Agency actions in contrast to
Eisenhardt gaming agent theory and telephone interviews dyadic interdependence
(2009) industry historical influence partnership formation
and performance
Pongsiri Oil and gas Public- Principal Indonesia, Historical Case studies Principal (national oil company)
(2004) industry private agent theory Malaysia, needs to design an incentive
and the USA contract that induces the agent
(international oil company) to
undertake actions that will
maximize the principal’s welfare
(continued)
performances
supplier
Assessing

295

Table I.
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296
112,2
IMDS

Table I.
Author
and
Publication Partnership Theory Highlights on impacts of
Year Industry category applied Nationality Data type Methods partnership

Richey et al. Manufacturing Commercial Resource- USA Perceptual Survey Technological readiness and
(2007) and retail based view complementarity in supply chain
are important capabilities for
firms to achieve attaining
superior logistics service quality
across partnerships
Tai et al. Manufacturing Commercial Supply Taiwan Perceptual Survey Electronic execution of
(2010) chain purchasing activities improves
orientation partnership which in turn
enhances supplier performance
Vachon Package Commercial Resource- Canada and Perceptual Survey and interview, Partnership with suppliers was
and printing based view USA hierarchical linear regression associated with better delivery
Klassen industry performance
(2006)
Zhang Construction Public- Principal Hong Kong, Historical Critical path method and Public-private partnership helps
(2009) private agent theory China and expert Monte Carlo simulation determine rate of return, cost
knowledge performance, and pricing
mechanism
 (1) Project scope change is the percent difference between the final and original Assessing
contract prices relative to the original contract price (Atkinson et al., 2006; supplier
Nah et al., 2001). This metric evaluate the supplier’s effectiveness relative to
forecasting customers’ needs and demands in the marketplace. performances
(2) Ratio of actual-to-estimated project costs is the ratio of the project actual final cost
to the project estimated cost. The cost is the sum of the materials and labor costs
(Smyth and Ash, 1985). This metric measures suppliers’ efficiencies associated 297
with cost centers of engineering, manufacturing, and logistics (Zhang, 2009).
(3) Gross profit margin is the difference between the contract value and the project
cost, divided by the contract value (Nadler and Kros, 2010). This metric is a
composite measurement that evaluates suppliers’ effectiveness in project
pricing and efficiencies in overall cost.
(4) Delay in deliverable shipments is the number of days between the estimated
delivery date specified in a purchase order and the actual delivery date of all
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deliverables. This metric measures the supplier’s effectiveness in managing the

value creation processes (de Treville et al., 2004).

For the first three metrics, we calculated ratios rather than dollar values to normalize the
associated prices and costs, so each project’s metrics are comparable to one another over
time.

Hypothesis development
We utilize supply chain partnership, project management, and principal-agent theory as
three prongs of the underlying fields to develop the following hypotheses. In the research
context, suppliers carry out complex manufacturing projects for customers that consist
of engineering, production, and delivery. A supplier can extend both partnerships and
arms-length mechanisms in the chain. The four performance metrics discussed
previously are utilized to compare suppliers’ performances before and after partnership
is instituted. We predict that suppliers’ performances will improve under partnership; we
also hypothesize that suppliers’ performances will remain status quo under arms-length
relationships due to the lack of coordination mechanism beyond using the market.

Effect of partnership on project scope changes

Changes in the project scope are indicative of a risk-adverse agent’s protective actions
against insufficient baseline definition by the principal (Clark, 1989). Customized projects
inherently generate considerable risk to suppliers (agents). It is not uncommon for
customers (principals) to make post-award scope changes and ask suppliers to absorb
subsequent impacts on costs or scheduling (Atkinson et al., 2006). These uncertainties
cannot be covered by fixed-priced contracts and will undermine suppliers’ profitability.
To reduce the risk of cost increases, the agent may unilaterally increase cost
estimates or inflate the cost evaluation, thus triggering a vicious cycle among suppliers
and customers (Lawson et al., 2008). One way to minimize changes is to have the
supplier-customer dyad fully understand the customer’s needs in the procurement
process through extensive information sharing and constant communication. Only
when a binding mechanism motivates information sharing to this degree can a balanced
relationship be achieved by customer and supplier. As the partnering mechanism works
 IMDS to reduce transactional risks, risk-averse suppliers are more likely to collaborate to
112,2 define project scopes.
Partnership provides an incentive to mitigate hazards on both parties, namely
customers’ opaque expectations, and suppliers’ incompliance for project specifications
or exaggeration on contract pricing (Liu et al., 2009; Pongsiri, 2004). Information
sharing, therefore, is likely to take place. Partners share key data on supply chain
298 processes which improve forecasting accuracy. This partnering mechanism promotes
a more receptive stance for customers to accept justifications for cost and schedule
arrangements and for suppliers to constrain changes (Zhang, 2009). Therefore:
H1A. For projects under a partnership, suppliers’ project scope changes will be the
same or lower after the partnership is instituted.
H1B. For projects under arms-length relationships, suppliers’ project scope changes
will be the same after a partnership is instituted within the customer base.
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Effect of partnership on ratio of actual-to-estimated project costs

A project-type supply chain organized under partnerships resembles vertical
integration (Errasti et al., 2009; Liu et al., 2009). First, the prospect of subsequent
business provides an incentive for the agent to attain efficiencies in supply chain
operations. Further, a partnership provides the mechanism to coordinate operational
arrangements and technical specifications because of information sharing on needs
and expectations of the participating entities.
Under a partnership, projects’ cost reductions, measured with ratio of
actual-to-estimated project costs, are accomplished as follows: first, supplier-customer
communication enhances information symmetry that helps a supplier estimate the
requirements for procurement and inventory control (Tai et al., 2010). Regarding
engineering processes, sharing information improves engineering efficiencies in that
suppliers’ understanding of customer requirements reduces the need for project
redesign. Ultimately, costs on manufacturing and labor are reduced as suppliers
improve scheduling and resource leveling (Manatsa and McLaren, 2008).
Partnerships also directly lead to higher transactional efficiencies. Close ties between
suppliers and customers lower suppliers’ costs of time and labor for pre-award
negotiation and post-award discrepancy settlement (Morgan et al., 2007). In sum, we
propose the following:
H2A. For projects under a partnership, suppliers’ ratio of actual-to-estimate costs
will be the same or lower after the partnership is instituted.
H2B. For projects under arms-length relationships, suppliers’ ratio of
actual-to-estimate costs will be the same after a partnership is instituted
within the customer base.

Effect of partnership on gross profit margin

A cooperative mechanism of partnership improves suppliers’ profitability through
enhanced project pricing and cost management (Duffy and Fearne, 2004). Information
symmetry reinforces coordination so that partners can harvest mutual benefits.
Supplier (agent) can accurately tailor the proposal according to the need of customer
(principal), and develop accurate scope of work and budget narratives (Pryke, 2005).
 With improved information sharing and reduced/removed transaction hazards, Assessing
partners’ valuation of the proposal reflects the win-win characteristic for the supplier
principal-agent dyad (Lawson et al., 2008; Zhang, 2009). The supplier can offer a price
that reflects a reasonable market value; in turn, the customer can accept the proposal performances
jointly developed at the lowest cost. The agreed project price will be close to the optimal
level and leads to maximum profitability for the supplier and the supplier-customer pair
as a whole (Ozcan and Eisenhardt, 2009). 299
Finally, as detailed previously, partnership can provide an incentive for a supplier
to improve cost performance in project execution. Integration among suppliers and
customers can help synergistically manage the purchased project’s operations and
labor to reduce suppliers’ and overall costs. Thus:
H3A. For projects under a partnership, suppliers’ gross profit margin will be the
same or higher after the partnership is instituted.
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H3B. For projects under arms-length relationships, suppliers’ gross profit margin
will be the same after a partnership is instituted within the customer base.

Effect of partnership on delay in deliverable shipments

Punctual shipments for project deliverables indicate that the supplier smoothly
implement and exert control over project production and logistics tasks (Errasti et al.,
2009). For large-scale projects, critical paths and conflicting sequences need to be
identified as early as possible. Delays in deliverable shipments are symptoms of inferior
project execution (Atkinson et al., 2006). Poor delivery also reflects the lack of
communication in evaluating the production and logistics tasks between customer and
supplier (Richey et al., 2007).
The partnership mechanism provides the incentive for the principal-agent dyad to
improve project deliveries (Vachon and Klassen, 2006). First, partnership induces greater
communication and reduces information asymmetry. Suppliers’ forecast of requirements
and scope definition are more accurate, hence preventing delays in supply chain processes,
e.g. engineering, procurement, production, and transportation. Even if uncertainties emerge
during execution, communication mechanisms can help identify problems, allowing
suppliers to execute alternate pathways in a timely manner (Agus and Hassan, 2008;
Pongsiri, 2004; Yuri and Doris, 2003). In sum, suppliers can perform high quality production
and logistics services and decrease overall delays in shipping project deliverables. Hence:
H4A. For projects under a partnership, suppliers’ project lead time will be the same
or lower after the partnership is instituted.
H4B. For projects under arms-length relationships, suppliers’ project lead time will
be the same after a partnership is instituted within the customer base.

Data and methods

Sample and study firm characteristics
A case study approach was employed to test the hypotheses (Eisenhardt, 1989b; Ellram
and Edis, 1996). One author served as an action researcher (a senior project manager) in the
case company during the change process. The researcher was responsible for the execution
of partner’s and other customers’ projects since the inception of the partnership. The case
company is a global supplier of industrial process analytical systems. Customers contract
 IMDS out manufacturing processes of analytical systems to the supplier on a project-by-project
112,2 basis. The manufacturing projects fit the 334513 industry group in the North American
Industry Classification System – industrial process variable instruments. According to
US Census Bureau (2011), this industry is nationally competitive. As of 2007, there were
775 firms with total industry sales of 8.75 billion US dollars. As shown in Table II, the
customers include 40 firms whose parent companies are in engineering, construction, and
300 petrochemical industries. All the projects were delivered for final use in the petrochemical
industry[1].
In August 2004, the case company formally established a partnership with one of its
customers – a Fortune 500 company in the oil and gas industry. The partnership was
established by a public announcement from the customer in the form of Memorandum
of Understanding (MOU). The MOU established a cooperative mechanism for the
partnering customer to collaborate with the studied supplier and bypass the routine
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procurement process. Namely, the customer would award the partnering supplier with
projects without seeking competitive bidding. Other customers maintained
arms-length with the case company during the study period.
The unit of observation for hypothesis testing is a complex project of an industrial
procurement relationship. A project constructs an analyzer house for on-site operations.
Each project is specifically designed with respect to labor, engineering, shop electrical,
shop piping, test, and field support. The time span of project data is four years:
.
October 2002-July 2004, prior to the partnership agreement.
.
August 2004-2006, during which the partnership was in effect.

Industry Companies

Engineering and construction industries

ABB Lummus Mitsubishi Heavy Industries
Bechtel Mitsui Engineering and Shipbuilding
Black & Veatch Mustang Engineers
Calpine Parsons
CB Engineers, Fluor TEC
Foster Wheeler Technip
Jacobs Stone & Webster
JGC Worley Parsons
KBR
Petrochemical industries
Air Liquide Formosa Plastics
Air Products Olin Corporation
BASF Pemex
BP Chemicals Petrobras
Chevron Phillips Premcor
Citgo Sterling Chemicals
Chiyoda Texaco
Conoco Phillips Sunoco
Dynergy Texaco
Table II. Eastman Texas Petrochemical
Customers in the sample Exxon Mobil Valero
 The case company’s operations and organizational structure relative to business Assessing
relationships remained unchanged from before the MOU to after the inception of the supplier
partnership during the entire course of the study. Among projects, the technological
level was similar and well distributed across projects for both the partner and other performances
customers. The workforce and cost components were common and typical across all
projects. Broadly speaking, there were no significant differences in the key features of
the projects. 301
Data on 801 proposals within the four-year period were examined with oversight from
the case company’s management. The action researcher reviewed its key documents for
all finalized projects – the original estimated sheets (OES’s) which contains contact
information of the supplier and the customer. It is a synopsis of the contract that lists and
tracks the primary financial data for project tasks, as detailed in Table III.
Among all proposals, the researcher identified 167 projects awarded by the partner
and customers, ranging from a few hundred to several million US dollars. The
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researcher collected accounting documents for data on original and final prices and
costs. In addition, operational logs were studied to identify shipping information
relative to shipping addresses and projects’ beginning and delivery dates.
We divided the projects into two groups: partner’s projects and arms-length
customers’ projects. Further, we separated projects of the two groups into two time
phases: two years before and two years after the agreement (Schoenherr, 2008). In the
partnership group, there are 28 projects before August 2004 and 28 afterward. In the
arms-length customer group, there are 41 projects before August 2004 and 70 afterward.
Four hypothesized variables are operationalized according to the methods
discussed in the literature review section. Finally, a new dummy variable is created
by coding 28 projects under partnership as “1” and other 139 projects as “0”.

Descriptive statistics of studied variables

Table IV provides descriptive statistics of project characteristics of our sample. For
studied variables, interestingly, partner projects display higher average project scope
change than customer projects (0.995-0.237). Overall, partner and customer projects’
ratio of actual-to-estimated project costs are similar in the study period (0.810 vs 0.813).
Partner projects display lower gross profit margin than customer projects (0.332 vs
0.351). Finally, partner projects demonstrate lower delay in deliverable shipments than
customer projects (27.730 vs 34.500).

Cost categories
Labor Materials Operations

Technical consultation and supervision Instrumental components Freight

Design Analyzer buyout materials Travel
Shop piping and fabrication Custom fabrications Commission
Shop electrical and staging Design piping materials Others
Factory testing Design electrical materials
Field service and construction Shop piping materials Table III.
Service Shop electrical materials Detailed cost items in a
Test equipment and supplies manufacturing proposal
 IMDS The dynamic among project groups is given further consideration. In Tables V and VI,
112,2 project scope change increased from 39.8 to 159.2 per cent for partner projects after the
agreement, whereas the ratio increased from 21 to 37.7 per cent for arms-length
customers. Ratio of actual-to-estimated project costs decreased from 89.2 to 72.8 per cent
for partner projects, whereas the ratio decreased from 84.8 to 79.2 per cent for arms-length
customers. Gross profit margin increased from 27.9 to 38.5 per cent for partner projects,
302
Arms-length customer
Partner (n ¼ 56) (n ¼ 111) All customers (n ¼ 167)
Project characteristics Mean SD Mean SD Mean SD

Final price 169,941.446 453,472.639 133,226.063 262,616.942 145,537.808 337,841.096

Final cost 126,648.643 365,362.466 100,675.351 198,829.405 109,384.958 265,662.277
Profit 43,292.800 89,128.859 32,550.710 67,846.578 36,152.850 75,552.580
Project duration (days) 133.710 87.191 128.130 135.635 130.000 121.312
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Project scope change 0.995 6.051 0.237 2.210 0.491 3.937

Ratio of actual-to-
estimated project costs 0.810 0.195 0.813 0.237 0.812 0.223
Gross profit margin 0.332 0.131 0.351 0.197 0.345 0.178
Table IV. Delay in deliverable
Descriptive statistics shipments 27.730 63.216 34.500 59.121 32.230 60.420

Metrics Group n Mean SD t-statistic Hypothesis Result

Project scope change Before 28 0.398 1.886 0.736 H1A Partially

After 28 1.592 8.384 supported
Ratio of actual-to-estimated Before 28 0.892 0.196 23.435 * * * H2A Supported
project costs After 28 0.728 0.158
Gross profit margin Before 28 0.279 0.114 3.298 * * H3A Supported
After 28 0.385 0.127
Table V. Delay in deliverable Before 28 40.000 85.264 21.467 * * * * H4A Supported
t-tests on metrics of shipments After 28 15.460 23.631
partner’s projects before
and after partnership Notes: Significance at: *p , 0.05; * *p , 0.01 and * * * p , 0.001; * * * *p , 0.10 levels (one-tailed
agreement tests)

Metrics Group n Mean SD t-statistic Hypothesis Result

Project scope change Before 41 20.001 0.168 0.870 H1B Supported

After 70 0.377 2.778
Ratio of actual-to-estimated Before 41 0.848 0.236 21.211 H2B Supported
project costs After 70 0.792 0.237
Gross profit margin Before 41 0.334 0.206 0.696 H3B Supported
Table VI. After 70 0.361 0.193
t-tests on metrics of Delay in deliverable shipments Before 41 45.270 74.028 21.323 * * * * H4B Not
arms-length customer After 70 28.200 47.814 supported
projects before and after
partnership agreement Notes: Significance at: *p , 0.05; * *p , 0.01 and * * * p , 0.001; * * * *p , 0.10 levels (one-tailed tests)
 whereas the ratio increased from 33.4 to 36.1 per cent for the arms-length customers. Delay Assessing
in deliverable shipments decreased from 40 to 15.46 days for partner projects, but supplier
decreased from 45.27 to 28.20 days for arms-length customers.
performances
Statistical procedures for hypotheses testing
We first examined correlations between the binary partnership variable and the four
metrics to preliminarily test variable associations. Next, the t-test method established 303
in literature was performed for hypotheses testing. A review of articles published in a
number of disciplines identified two types of research methods to examine changes
before and after a significant event. The preferred and more correct method of applying
t-test to test for changes requires investigator(s) to implement experimental studies
and control studied subjects in laboratory or classroom settings (Bowers et al., 2009;
Duffy et al., 2010). In doing so, the method can ascertain that other factors beyond
studied variables maintain constant.
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The second and less desirable research method of testing changes before and after a
significant event, which is used in this study, utilizes t-test to get the inferences as well. In
contrast, the data of the method is not collected from a controlled environment, but from
openly functional systems, e.g. business entities, countries, etc. where experimental
methods are not feasible. While the investigator(s) cannot control the non-experimental
environments, the comparison needs to be validated. Specifically, the research context
needs to maintain largely the same before and after the event to ascertain the event as the
primary factor contributing to the changes. The non-experimental methods have been
applied to test the impacts of business strategies, e.g. merger and marketing actions
(Chavadi and Kokatnur, 2009; Selvam et al., 2009), and regional economic changes,
e.g. 9/11 terrorist attacks, North American Free Trade Agreement, EU trade
harmonization (Kim and Gu, 2004; Sarkar and Park, 2001; Yamin et al., 2007).
We performed a series of tests to examine the requirements for independent sample
t-tests. First, concerning the independence among observations, the observations,
i.e. procurement projects, were deemed independent. Projects were created as one-time
entities and none of the projects in each group was associated with one another in
terms of design, processing, and value.
We tested the normality of hypothesized variables with the Anderson-Darling
statistic. Only cost performance and gross profit margin displayed normal distribution.
Harnett et al. (1993) suggested that t-test is robust with large sample size even if the
data does not display normality. As such, considering the relatively large sample size
(both n1 and n2 larger than 30), we proceeded with t-tests according to the norm among
researchers and practitioners (Doane and Seward, 2009).
Finally, we performed F-tests for all variables to test equal variances in the two
periods (Doane and Seward, 2009). The cost and profit performance variables in both
project groups display equal variances. We hence performed t-tests with equal variances
for these variables. For the remaining variables, we performed t-tests without equal
variances.

Results
Correlation analyses
Correlation analyses reveal that partnership is positively associated with project scope
change (r ¼ 0.126, p , 0.10) and gross profit margin (r ¼ 0.103, p , 0.10),
 IMDS but negatively associated with cost ratio (r ¼ 2 0.169, p , 0.10) and delay of project
112,2 deliverables (r ¼ 2 0.125, p , 0.10). In terms of partnership’s impacts, the results are
consistent with H2A, H3A, and H4A, but not H1A on project scope change.

H1: project scope change vs partnership

H1A suggests that the project scope changes in projects of the case company may not
304 increase under the partnership. In Table V, the one-tailed t-test fails to reject the null
hypothesis (t ¼ 0.736, p . 0.10). Namely, the mean values of this variable are
statistically identical in the two periods[2].
Regarding H1B, the one-tailed t-test fails to reject the null hypothesis that the values
of project scope changes are not different for arms-length projects in the two periods[2]
(t ¼ 0.870, p . 0.10) (Table VI).

H2: ratio of actual-to-estimated project costs vs partnership

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H2A suggests that the ratios of actual-to-estimated project costs of the case company
may decrease under the partnership. In Table V, the one-tailed t-test rejects the null
hypothesis and concludes that this ratio is significantly lower under partnership
(t ¼ 2 3.435, p , 0.001).
Regarding H2B, the one-tailed t-test in Table VI fails to reject the null hypothesis
that the mean values of ratio of actual-to-estimated project costs are the same for
arms-length projects in the two periods (t ¼ 2 1.211, p . 0.10).

H3: gross profit margin vs partnership

H3A suggests that the gross profit margins in projects of the case company may
increase under the partnership. The one-tailed t-test in Table V rejects the null
hypothesis (t ¼ 3.298, p , 0.01); hence, profit margin is much higher under partnership.
Regarding H3B, the one-tailed t-test in Table VI fails to reject the null hypothesis
that the profit margins did not increase for arms-length projects (t ¼ 0.696, p . 0.10).

H4: delay in deliverable shipments vs partnership

H4A suggests that the delays in deliverable shipments of the case company may
decrease under the partnership. In Table V, the one-tailed t-test suggests that delay is
lower under partnership (t ¼ 2 1.467, p , 0.10).
We found an interesting yet similar result for delay in deliverable shipments for
arms-length projects (t ¼ 2 1.323, p , 0.10). Thus, H4B is not supported (Table VI).

Discussion
Comments on H1
Interestingly, project scope changes were statistically identical before and after the
instituted partnership. The stability of this variable implies that the partnership helps
sustain the project scopes. The partnering mechanism may allow the supplier to avoid
scope creep in projects for the partnering customer.

Comments on H2
We found that ratios of actual-to-estimated project costs after the partnership were
lower than those before the partnership. Using proposed project costs as the baseline,
 the case company was able to either reduce expenses for the partner’s project or keep Assessing
the expenses from inflating.
The studied partnership might provide an incentive for the supplier to collaborate with
supplier
the partner customer through project tasks and maintain transparency for cost information. performances
Since the supplier became neutral to risks in the partnership, it might be willing to minimize
operational costs, thus achieving higher efficiencies.
305
Comments on H3
We found support for H3. The actual mean values of the gross profit margins for the
projects after the agreement between the partners and the arms-length customers are
rather close (Tables III and IV). The results relative to H2, H3 together may imply that
increases in gross profit margins under a partnership are primarily the result of cost
efficiencies rather than price increases. Namely, suppliers might gain better
profitability via improved efficiencies.
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Comments on H4
Curiously, the mean values of delay in project delivery for both the partner and
arms-length customers decreased after the instituted partnership. These results may
suggest that a partnership first motivates the supplier to improve logistics
performance for the partner’s projects. The partnership in turn enhances the
supplier’s performance for its entire downstream supply chain which exhibits an
overall improvement in lead time for all other projects.
Furthermore, we note that the values of the partner company’s projects declined
after the partnership was instituted. This may be correlated with lead time, since
smaller contracts likely mean shorter time for completion. We thus examined the
correlation between delay of project delivery and contract prices for all projects. The
correlation coefficient is 0.05, implying marginal impacts of contract values on project
delay. This finding, together with results of H4, suggests that partnership may be
associated with lead time performance.

Supplementary analyses
The results summarized in Table VII reveals that the total number of projects awarded
by the partner before and after the partnership were the same; however, the total

Before After Change

agreement agreement (%)

Partner No. of projects 28 28 0

Percentage of total number 40.6 28.6 229.6
Arms-length No. of projects 41 70 70.7
customers Percentage of total number 59.4 71.4 20.2
Partner Total contract value $6,410,262 $3,106,459 251.5
Percentage of grand total 64.9 21.5 266.9
value Table VII.
Arms-length Total contract value $3,465,982 $11,322,111 226.7 Number of contracts and
customers Percentage of grand total 35.1 78.4 123.4 contract value of projects
value with partner and others
 IMDS number of projects awarded by arms-length customers increased by 70.7 per cent
112,2 during this same period of time. Furthermore, the total value of the partner projects
decreased significantly after the partnership, while total sales value of all the contracts
from the other customers more than doubled.
This comparison suggests that while partnership may enhance the case company’s
gross profit margin, the improved profitability does not necessarily translate into higher
306 revenue. We also examined a trade-off characterizing additional partnership efficiency.
An additional metric based on the quantity of projects and project quotes was
examined. A capture ratio is an indicator developed by the case company and is defined
as the ratio of the actual number of projects awarded by customers to the actual number
of quotes submitted to customers over a specific period. Table VIII reveals contrasts
between the partners and arms-length customers with respect to this indicator.
The capture ratio for partner projects was 75.7 per cent before the partnership and
87.5 per cent afterwards, respectively. For arms-length customers, the capture ratios
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were 14.5 and 15.6 per cent before and after the partnership agreement, respectively.
A higher capture ratio is in fact one of the desirable results to maximize mutual
benefits. The better capture ratio may imply that transaction efficiency increased after
the partnership was formally adopted. This efficiency in turn lowers operational costs.

Managerial implications
Under partnerships, the primary goal of a supplier is to enhance its bottom line through a
combination of lowering operating costs, improvement on pricing, and increasing
profitability. Our empirical work identified financial gains for the supplier under
partnership. The findings further indicate that in a project environment, partnership
may lead to benefits which are not nominal but can result in operational improvement.
Functional partnership requires manufacturer (principal) and supplier (agent) to be
realistic, focusing on reaching a win-win outcome instead of meeting all expectations.
Here, the partnership was found to enhance cost and profitability performances on the
supplier side. With that said, supplier and manufacturer are not necessarily involved in
a zero-sum game. Cooper et al. (1997) clearly stated that better coordination will not
only benefit individual firms but also the entire supply chain. As such, the
manufacturer may extend or strengthen the partnership to enhance project
coordination with the supplier to jointly increase mutual gains.
We found that the supplier’s ratio of actual-to-estimated project costs decreased under
partnership. Given that the supplier can transfer cost increase to manufacturers, this
finding implies that a supplier may be cautious to minimize project costs under partnership.

Before agreement After agreement Change (%)

Partner
No. of quotes 37 32 213.5
No. of projects 28 28 0
Capture ratio (%) 75.7 87.5 15.6
Table VIII. Others
The capture ratios for No. of quotes 282 450 59.6
partners and other No. of projects 41 70 70.7
customers Capture ratio (%) 14.5 15.6 6.7
 The improvement in profit margin may be an indicator for potential win-win Assessing
partnership. In a zero-sum game, a manufacturer mandates a project price range to supplier
maximize its earning, while sacrificing the supplier’s profitability. Our study suggests
that the supplier may be able to enjoy higher profit margin via partnership. performances
This improvement may result from information being shared with respect to pricing
negotiation and the aforementioned cost minimization.
Punctual delivery of project deliverables can ensure financial performance and 307
safeguard partners from operational and transactional risks. Decreasing delay
improves customer service and often translates to greater savings and a better
long-term business relationship.
Our supplementary study on capture ratios implies that the partnership led to
reduced costs relative to procurement efforts. However, the supplier cannot assume
that the partnership will automatically result in profitability. Strategic design of
cooperative mechanism is necessary to provide incentive for principal and agent to
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yield the desired benefits.

Concluding remarks
Recently, commercial partnerships have gained much attention from scholars and
practitioners because of the perceived benefits to individual partners and supply chain
as a whole. This paper employed insights from supply chain management, project
management, and principal-agent theory on partnerships to examine the effects of a
commercial partnership and arms-length relationships on supplier performances in
project-type supply chain. We took the supplier’s standpoint in an industrial
supplier-customer relationship and hypothesized that the partnership will help
supplier to reduce project scope changes, enhance cost performance, improve gross
profit margin, and reduce delay in lead time to customer.
We performed a case study that reviewed 801 proposals by an analytical system supplier
for customers in multiple industries. A unique dataset of financial and operational estimates
was compiled from 167 awarded projects. The t-test analyses supported assertions that
ratios of actual-to-estimated project costs, gross profit margins, and delays in deliverable
shipments improved significantly for the supplier under the partnership agreement,
while the general performance for arms-length projects maintained status quo. These
findings are indicative that partnerships can contribute to the case company’s operational
parameters, improve its bottom line, and concurrently benefit its partnering customer.
The findings of this paper are largely consistent with the prediction in literature
that developing and implementing an incentive mechanism through partnering
relationships will have mutual benefit. Moreover, although a partnership can enhance
operational efficiencies, the partnership alone does not guarantee an increase in
revenue. A supplementary study on a new measure, capture ratio, indicates that under
the studied case, the supplier may be able to reduce transaction costs when developing
projects. It hence suggests that customers should promote a partnering environment
that fosters the performance by agent.

Limitations and future research

This paper applied techniques of correlation analyses and “before and after” type of
t-tests to examine a limited number of variables relative to supplier performances.
The empirical results found association between partnership and performance.
 IMDS However, the causation between partnership and performances cannot be determined
112,2 by the applied statistical approaches. Further, to overcome the constraints in the
non-experimental settings, more comprehensive data on firm or project characteristics
will need to be collected to implement more advanced methods.
Several tasks can be considered to simultaneously study the above causal
relationships and the impacts of additional variables on performances. First, additional
308 data needs to be collected on variables which will potentially impact firm performance
(e.g. marketing and IT investment). Additionally, a more sophisticated methodology,
such as multivariate regression analysis or structural equation modeling, will be
necessary to evaluate partnership’s direct impacts while controlling other contributing
factors. The partnership’s impacts can then be differentiated. A cause-effect approach
(e.g. longitudinal case study) may be performed to determine the causal relationships
between partnership and performance metrics as well.
There is a limitation in the specific context of the present research. We assess
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benefits from a particular type of partnership. While performance improvements can

be witnessed in the present study, this inference may not be extended to other type of
partnership. For example, the existence of informal, yet de facto partnership may
benefit partnering firms. Future research may investigate other partnering
mechanisms which will actually impact performance.
There is a limitation measuring the project cost performance. It is generally
accepted that project estimates include a “fudge” factor. Measuring “estimated cost”
could introduce the fudge factor in the results. Accordingly, the readers are advised to
interpret the outcome of the research as a general trend rather than a quantitative
prediction in order to avoid any bias.
The newly introduced capture ratio needs to be viewed as a holistic indicator for
transaction efficiencies. Future research should consider performing the following data
collection strategies to increase observations for statistical tests:
. Single firm with multiple products/services.
.
Multiple firms in one industry.
.
Multiple firms across industries.

A richer data set on this variable may offer insights into transaction efficiencies under
partnership.

Notes
1. All the projects were delivered for final use in the petrochemical industry, not for the
petrochemical industry and for the engineering and construction industry. The two terms:
engineering and construction companies and end-users (petrochemical industry) refer to the
studied firm’s immediate customers that would buy its products. In some cases, the
engineering and construction companies were intermediary customers acting on behalf of
and advising the petrochemical companies or end-users. In the other cases, the end-users in
the petrochemical industry will themselves place the orders with the studied firm.
2. Additional tests were performed using a censored dataset. Outlying data entries due to rare
occasions of adjusting project prices to compensate cost increases were removed. One entry
was removed from both before and after the partnership, respectively. In the arms-length
customer dataset, we removed one entry from after the partnership.
We performed t-tests for the censored data before and after the partnership. For the
 partner project group, the t-test failed to reject the null hypothesis (t ¼ 21.18, p . 0.10), Assessing
similar to the results with complete data. For arms-length customer, the t-test rejected the
null hypothesis and found that project scope change was higher for arms-length customers supplier
after the partnership was in effect (t ¼ 1.49, p , 0.10). The results were not inconsistent with performances
the initial findings.

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 IMDS About the authors
Dr Liang-Chieh (Victor) Cheng is an Assistant Professor in the College of Technology at the
112,2 University of Houston. His current focus of research is strategic supply chain management
and inter-organizational information technology. Dr Cheng’s research has resulted in publications in
Industrial Management & Data Systems, International Journal of Production Economics, Journal of
Business Logistics, International Journal of Agile Systems and Management and International
Journal of Manufacturing Technology and Management. Liang-Chieh (Victor) Cheng is the
312 corresponding author and can be contacted at: lcheng6@uh.edu
Edward E. Carrillo is a Senior Supervising Engineer at WorleyParsons – Resources & Energy
and an Adjunct Professor at the College of Technology at the University of Houston.
He specializes in the development, applications, and integration of petrochemical process
analyzers. He holds a MS degree in Technology Project Management with the concentration in
Logistics and Supply Chain Management, from the University of Houston.
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