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  • International Journal of Engineering Business Management

    The Strategic Importance of Supplier Relationships in the Automotive Industry Regular Paper

    Ove Brandes1,*, Staffan Brege1 and Per-Olof Brehmer1 1 Department of Management and Engineering, Linkping University, Sweden * Corresponding author E-mail: ove.brandes@liu.se Received 8 June 2012; Accepted 16 December 2012 DOI: 10.5772/56257 2013 Brandes et al.; licensee InTech. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

    AbstractTheaimofthispaperistoanalyselongitudinallythe development of purchasing strategies in theautomotive industry during the last 20 years. Theamplitudeofthebusinesscycleduring this time framehasbeenveryhighandincludesperiodsoffinancial/automotivecrisis aswell as high sales and demand.Our empiricaldata is primarily drawn from a 19902010 longitudinalcasestudyof therelationshipbetweenautomakerVolvoPersonalCars andAutoliv, a supplier of seat belts andairbags,complementedwithsecondarydata framing thedevelopmentoftheindustrylevel.Thetheoreticalfocusison outsourcing and purchasing strategies developedwithin longlasting buyersupplier relationships;theoretical pillars are found in transactioncost theoriesandtheresourcebasedviewofthefirm.Based on the longitudinal case study, our analysispinpoints the importance of intimate cooperationbetweencustomerandsupplierinareasclosetothecorevalues and core competences of the buyer (that is, theautomaker). From an industrylevel perspective, thewinners in the automobile industry from 2010 andonwardshavebeenandwillbe thosewhocanorganizelongterm collaboration partnerships between theautomakers, their suppliers, and the politicalstakeholders,andwho canoutsourcea largepartof thetechnicaldevelopmenttothesuppliersinareasalsoclose

    to the core competences. The automakers must acceptthat their suppliershave competingautomakersas theircustomers and search for synergies in their productportfolio. Theoretically, there is a need for conceptualdevelopment through deeper studies of the firmsrelationalcapabilityanditsimplications.Keywords Supplier Relationships, LongTermCooperation, Technology Development, AutomotiveIndustry1.IntroductionThe current crisis in the global automotive industry hastwomajordrivingforces.ThefinancialcrisisthatbeganinSeptember 2008 revealed the underlying structuralproblem, namely the longterm misfit between globalsupply anddemand forpersonal cars (more than 20percentinvolume[1]andwiththelargepartinEurope).For2012anincreaseofupto30percentisindicated.Thetotaleffect is the most dramatic change for the automotiveindustry since World War II, both in terms of finance,technology, and political influence on employment andlocation of factories.Also, pressure has increased on theautomotiveindustrytoreduceemissions.

    Ove Brandes, Staffan Brege and Per-Olof Brehmer: The Strategic Importance of Supplier Relationships in the Automotive Industry

    1www.intechopen.com

    ARTICLE

    www.intechopen.com Int. j. eng. bus. manag., 2013, Vol. 5, 17:2013

  • There are important differences in how the structuralproblems have affected the actors in the personal carsupplychain.Theautomakers/OEMs(originalequipmentmanufacturers) and the small and mediumsizedsuppliers have experienced more problems than theleadingprimesuppliers(suchasAutoliv,Bosch/Nippondenso, and SKF). Car manufacturers in the premiumsegment(AudiandBMW)havebeenthemostsuccessfulfinancially.However, theyhavenowalsobeen forced toconsiderwhether theyhavegone too far in costcuttingandglobalpurchasing.Theymustquestionwhether it istimetoreconsidertherelationshipswithsuppliers,whichovertheyearshavebecomemorearmslength(includingrelationships with nonUS companies), and to increasecooperationwithsuppliers.Aweakfinancialpositioncanin itself force theOEMs in thepremiumsegment torelymoreonsuppliers,asituationthathasexistedfora longtime among lowvolume producers, such as Volvo CarCorporation (Volvo),especiallybeforeFordacquired thecompanyin1999.Thepurposeofthisarticleistoanalysethedrivingforcesand strategies for buyersupplier cooperation in areasclose to thecorevaluesandcorecompetencesof thecarmanufacturers.This studys empirical example isVolvoand especially its relationship with Autoliv, a worldleading supplier of car safety products. The studycoveredaperiod from thebeginningof the1990sup to2010, including the takeover ofVolvoPersonalCars byFordin1999.Duringthisperiod,Volvochangedstrategyfor many important parts and systems from inhousedevelopment to outsourcing and close innovativerelationships. During the Ford era, Volvo also wasintegratedintoFordsglobalsourcingactivities.2.OutsourcinginTheoryThestandardrecipeforoutsourcing,intheliteratureandalsoinpractice,istokeepcoreactivitiesandresourcesinhouse. For complementary resources and capabilities,partnershiprelationsarerecommended,andforstandardsolutions to buy at arms length [2]. But what isconsideredcoreischangingovertime.Prahalad and Hamel [3] defined core competences asthosetechnologiesthathelpthecompanytostayaheadofcompetition over long time periods. Core competencewill be transformed into value to customers, will bedifficult to imitate, and will be useful for differentproducts andmarkets.Other authors looked upon corecompetences not so much as technologies as coreprocesses and capabilities, which may be based oninternal competences and also may originate fromstrategicrelationships[4].Outsourcingalsocanbeseenasa radical contrast to the conventional wisdom ofcompetitive strategy [5,6], since it is away to achieve a

    combination of two strategies at the same time costleadershipanddifferentiation.2.1TheLogicsforOutsourcingIn the literature, fivedifferent logics foroutsourcingcanbe found: cost cutting, core competence focus, control,flexibility,andaccesstoexternalresources.Thefirst logiciscostcuttingor lowestcost.Costisoftenconsideredthemostimportantcriteriaforanoutsourcingdecision[7,8].Acomparisonhasbeenmadebetweenthecost for inhouse production and external sourcing [9].However, different cost dimensions are emphasized intheliterature.Williamson [10] divided costs into production andtransactioncosts.Withatransactioncostperspective,thecompanyisprimarilyconsideredagovernancestructure.Transactioncostsincludeanumberofexantecosts,suchasdrafting andnegotiations, and expost costs, such asmonitoring and enforcing agreements [11]. A tradeoffexistsbetweentransactionandproductioncosts.Inhousecontrolwilltypicallyinvolvelowertransactioncosts,but,atthesametime,willsacrificethepotentialforeconomiesof scaleand thecollectivepoolingof resources found inanoutsourcing/marketsolution.Analysisoftheproductionfunctionandproductioncostscan be found among more traditional industrialorganizationscholars(seee.g.,[1214]).Thepotentialforeconomies of scale and scope are often the mostimportantaspectswhenoutsourcingdecisionsaremade.Other factors such as availability of raw materials andcomponents, intellectual property rights, and afavourablegeographicallocationarealsoimportanttothelowestcostlogic[5].The second logic isbasedon longterm competitivenessrooted in the corporations core competence. Bydefinition,thecorecompetencehascomplexandsystemicproperties with tacit knowledge and competencesembedded in organizational and cultural contexts[3,15,16]. Organizational learning is important for thedevelopmentofcorecompetence.Thestrategicimplicationofthisperspectiveisthat corecompetenceshouldbekeptinhouse; the availability of important complementary

    resources in partnership relationships should besecured;

    the supplyof commodities shouldbe foundvia themarketmechanism[2,7];and,

    outsourcing decisions might require upgrading ofcompetence[17,18].

    Int. j. eng. bus. manag., 2013, Vol. 5, 17:20132 www.intechopen.com

  • The concept of core competence has many aspects incommonwithWilliamsons conceptof transaction costs.Core competence isnot a simple skillor asset [19], andcanrangefromwhatwedobesttowhatthecustomersvalue the highest [20]. Some researchers argue that theapplicationoftheresourcebasedviewtooutsourcinghasbeen themostvitaldevelopmentduring the lastdecade[21].The third logic,control, isbasedon theassumption thatoutsourcingshouldbeavoided incaseswhere there isahigh riskofsupplieropportunism.Adominantsupplierwith unique resources (high asset specificity) and aninformation advantage (information asymmetry) mightbehaveopportunistically[22].Asuppliershighpricesarenotonlyacostproblem;thebuyeralsocouldlosecontrolof lead times (timetomarket and timetocustomer),quality,andproductdevelopment[23].The fourth logic, flexibility, is important in itsownrightinahighlydynamicenvironment.Itistemptingtotrytotransform fixed costs into variable costs by outsourcing[2426], especially when companies face a need forinvestments innewmachinery, factories, or IT systems.This situation can trigger outsourcing decisions. Acombinationofinhouseproductionandoutsourcingcanalsobeaviablesolution[20].Furthermore,ahighdegreeof uncertainty regarding new technology can lead tooutsourcing as a firm seeks to maintain flexibility andreducecostsatthesametime.The fifth logic is access to superior external resources,which is themost relevant logic in this article.Deavers[27]mentionedaccess toworldclass competenceasoneofthetopfivereasonsforoutsourcing.Othershavemadesimilar arguments [18,28,29]. The ability to exploitexternal resources puts the management of supplierrelationshipsintofocus.2.2AnalyticalModelIn thecaseof theautomotive industry,Helperetal. [30]pointed out one major theoretical problem in theircomparison of the American and Japanese automotiveindustries.They argued that theAmerican strategy is amarket organization while the Japanese strategy is ahybrid organiza