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Buyer-Supplier Relationships and Organizational Health

Buyer-Supplier Relationships
and Organizational Health

AUTHORS

Marie McHugh INTRODUCTION


In recent years, the relationship between buyers and
is a professor of organizational behavior and head of the School of suppliers has received considerable attention. Due to the
Business Organization and Management at the University of Ulster globalization of markets, corporate restructuring, and
increased focus on costs, quality, flexibility, and tech-
in the United Kingdom.
nology, an expanded role for procurement has emerged
Paul Humphreys (Burt, Dobler, and Starling 2003). Traditionally, pur-
chasing was considered a clerical function, where the
is a reader in operations management within the School of Business
relationship between suppliers and buyers tended to be
Organization and Management at the University of Ulster in the adversarial. However, many organizations have moved
United Kingdom. toward a more collaborative approach.
Gadde and Hakansson (1994) identified three key stra-
Ronan McIvor
tegic purchasing issues: the make or buy decision, the
is a senior lecturer in e-commerce within the School of International supply base structure, and the customer-supplier rela-
Business at the University of Ulster in the United Kingdom. tionship. They and Cox (1996) emphasized the need
for organizations to move toward closer cooperation
This article examines the relationship between orga- in the buyer-supplier relationship. Market pressures for
increased product complexity and variety demonstrate
nizational health and buyer-supplier relationships.
the ever-expanding need for a team-oriented mind-set.
Contemporary research has emphasized the need for
Consequently, they need to supplement their core com-
organizations to move toward closer cooperation.
petencies by allying with other providers of comple-
The decision to engage in partnership arrangements
mentary competencies to satisfy their customers. The
is one that has major implications for buyers and real productivity, design, and quality improvements are
suppliers. Using evidence from an exploratory case not obtainable unless the supplying partners innovate
study, the challenges presented in to the best of their abilities. Hence, many manufacturers
SUMMARY developing a close, cooperative, recognize that their ability to become world-class com-
and mutually beneficial trading petitors is based to a great degree on their ability to
relationship between a buyer and a supplier, where establish high levels of trust and cooperation with
one partner, the buyer, is in a powerful position, are their suppliers.
investigated. It is argued that powerful buyers can Indeed, the advantages of closer cooperation have been
seriously damage organizational health. The find- cited by Magnet (1994) and Helper and Sako (1995), who
ings provide evidence that it is essential to promote noted that closer relationships between customers and
suppliers have had beneficial effects on performance in a
communication structures that encourage dialogue,
number of areas. As a collaborative or partnership arrange-
consultation, and employee participation in deci-
The Journal of Supply Chain ment between buyer and supplier, this requires a major
Management: A Global sionmaking. This is particularly important where
Review of Purchasing and shift in the mind-set or operational paradigm, from what
decisionmaking could benefit from the in-depth
Supply Copyright © May 2003, has been termed arm’s-length contractual relationship
by the Institute for Supply technical knowledge of middle and junior managers to obligational contractual relationship (Sako 1992).
Management, Inc.™
and shopfloor workers. The need for a reassessment of the nature of, and bene-
fits to be derived from, buyer-supplier relationships was
EXAM
further argued by Kerwood (1995), who commented that
much of the current literature on effectiveness and success
suggests that success can only be achieved at the expense
Module 2

The Journal of Supply Chain Management | Spring 2003 15


Buyer-Supplier Relationships and Organizational Health

of others such as competitors, suppliers, and customers Despite its clouded definition, it conjures up positive
(Jarillo 1988). However, theory and research from an images of the organization, regardless of the indices
interorganizational relationship perspective have begun that one might use to measure “health” in organizational
to acknowledge the role of cooperation in organizational terms. For example, an organization might be “finan-
success (Nielson 1988). cially healthy,” “strategically healthy,” “structurally
Many companies recognize that their ability to become healthy,” “culturally healthy,” and/or “behaviorally
world-class competitors is based, to a great degree, on healthy.” Although the existing literature does not pro-
their ability to establish high levels of trust and coopera- vide or permit a succinct definition of organizational
tion with their suppliers (Buono 1997). With higher health, within this article the healthy organization is
standards of performance being demanded in each busi- considered to be one whose structure, culture, and man-
ness environment, companies are of necessity looking agement processes contribute to high levels of organiza-
to their suppliers to help them achieve a stronger com- tional performance. As part of this, it is believed that
petitive position. Indeed, it has been suggested that in a individual and organizational health are interdependent
world of converging consumer tastes, rapidly spreading entities. Thus, indices of the healthy organization are
technology, escalating fixed costs, and growing protec- likely to include measures of employee stress and well-
tionism, more collaborative relationships with suppliers being, employee satisfaction and commitment, the per-
are critical instruments for serving customers in a global ceived quality of management decisionmaking, the
environment (Ohmae 1989). appropriateness of structural arrangements, and finan-
cial indicators. One aspect of organizational health con-
These views are endorsed by others who argue that the
cerns decisions regarding buyers and the development
basis of modern competition is continuous improvement
of good buyer-supplier relationships of the partnership
in products and processes (in other words, the simulta-
variety referred to above.
neous achievement of both efficiency and innovation).
The cooperative approach between buyers and suppliers
BUYER-SUPPLIER RELATIONSHIPS AND
is based on recognition of mutual interest, particularly
ORGANIZATIONAL HEALTH
where components provided by suppliers are a large pro-
Despite the wisdom of the arguments concerning the
portion of the cost of the final product. It involves assisting
formation of partnerships and the contribution that
the customer to provide a higher-quality, lower-priced
buyer-supplier relationships make to organizational
product, for example, through long-term supply relation-
health, it is important to point out that the necessary
ships, general management advice, and possibly through
levels of interfirm trust are not always present in the
research and development, training, and loan guarantees
buyer-supplier relationship to permit collaboration to
(Hendry et al. 1995). Common aspects of customer-
become a reality. The mistrust, which is often evident,
supplier partnerships include: long-term relationships
is the result of many years of broken promises, abuse
based on trust and cooperation rather than competition
of confidence, and general acrimony within manufac-
for each order, thereby giving the supplier a stronger
turing industry (DTI 1989; Burnes and New 1997). As
interest in the quality of the goods supplied; devolution
such, partnership can in fact be a double-edged sword
of design work to the supplier; cooperation to improve
where, although there is “security” in the relationship,
performance and quality, sometimes involving advice
there is potential for a powerful partner (usually the buyer)
from the customer’s supplier development teams; and
to show the strength of its muscles, squeezing the sub-
target pricing in which the customer sets price reduc-
missive partner (usually the supplier), to such an extent
tions and helps the supplier to achieve them. In many
that it is potentially harmful to both sides in the relation-
ways, it can be argued that these features of partnership
ship. The squeezing is likely to manifest itself in, for
are highly similar to aspects of organizational processes
example, ever-increasing demands for higher quality at
and functions that have been cited as characteristics of
lower costs and ever-shortening leadtimes (Porter 1980;
the healthy organization. For example, the establish-
Miller and Dess 1996). One example of this is provided
ment of good relationships, trust and cooperation, and
by the trading relationship between the major toy retailer
appropriate devolution cited as essential elements of
Toys“R”Us and the manufacturer Mattel. The dominance
partnering by Boddy et al. (1998) have been frequently
of the retailer in this partnership, reflected in, among
linked to the healthy organization (De Vries and Miller
other things, its decision to drastically reduce inventory
1990; Cox and Haworth 1990; Cooper and Williams
stocks, has caused major problems for the supplier
1994; Newell 1995).
(BusinessWeek 1999).
ORGANIZATIONAL HEALTH Such behavior is indicative of a lack of understanding
Organizational health is a poorly defined but widely of the principles underlying the true meaning of partner-
used concept (see, for example, De Vries and Miller ship as outlined by Partnership Sourcing (1990). Within
1990; Cox and Haworth 1990; Cooper and Williams this, it is argued that customer and supplier work as part-
1994; Newell 1995; McHugh and Brotherton 2000). ners, believing that teamwork is better than combat,

16 The Journal of Supply Chain Management | Spring 2003


Buyer-Supplier Relationships and Organizational Health

and that “both must win” (ibid). In making partnerships knowledge, understanding, and acceptance of the poten-
work in a healthy way, thus contributing to the creation tial benefits for inter- and intra-organizational health
of healthy organizations, there is a need for the effective and well-being to be gained from collaboration. The
formation and implementation of a web of interfunctional abuse of buyer power is a contradiction of the philos-
relationships within each of the organizations (Kanter ophy of partnership advocated by Sako (1992) that has
1989). This must be accompanied by goal clarity between been linked to organizational success (Neilson 1988)
buyer and supplier, a clear understanding and acceptance and that works to erode the health of organizations.
of roles and responsibilities, and a sharing of ideas (Boddy Furthermore, it may be argued that the abuse of power
et al. 1998). beyond a certain point may adversely affect the buying
While initially it may be to the buyer’s advantage to company itself. In many respects, such a relationship is
squeeze its supplying partner, the advantages are likely akin to the nature of buyer-supplier relationships described
to be short lived. Not only does excessive squeezing by Cox (1996), whereby each member of an organiza-
potentially destroy the relationship between the buyer tional network will seek to do what is best for itself in
and the supplier, but also it is likely to foster a state of terms of achieving “the greatest competitive and profit-
ill health within the supplier organization that is likely making advantage.” This is far removed from and stands
to impact the buyer with the emergence of a vicious spiral in stark contrast to the type of mutually advantageous
of negativity. The ill health within the supplier organi- partnership relationship built upon mutual trust, open-
zation is likely to be caused by the excessive demands ness, and sharing described by Lamming (1993) and by
being made by the buyer, which are passed down to Womack and Jones (1996).
employees who, among other things, are in turn under Within the context of a larger study that examined link-
severe pressure to deliver enhanced quality in a shorter ages between different aspects of organizational health
time. More often than not, constantly responding as (McHugh 1996), this article aims to explore the delete-
and when required to a demanding supplier can cause rious effect that complete dependence upon a powerful
confusion, chaos, and interference with management buyer may have upon organizational health. It is con-
decisionmaking within the supplier organization. cerned with the case of a financially healthy organiza-
Simultaneously, the supplier organization is trapped in a tion engaged in a trading partnership with a powerful
trading relationship and its energies and resources are so buyer regarded as being one of the most successful retailers
submerged in coping with this highly charged situation in the United Kingdom. Using a case study approach
that it has no opportunity to escape from the relation- that involves the collection of primary and secondary
ship, or to rationally consider alternative ways of man- quantitative and qualitative data, it seeks to show that
aging its circumstances. While this in itself is unhealthy, where a buyer is all-powerful, it is exceptionally difficult
it may be argued that as an outcome of the unrelenting to fully implement and reap the benefits of a true win-
pressure exerted by the powerful buyer, a cycle of nega- win contractual obligational relationship of the variety
tivity emerges whereby the excessive demands of the buyer advocated by so many as being important in the achieve-
throw the supplier organization into a state of chaos and ment of competitive advantage. Equally, it indicates
confusion that negatively affects management processes that a relationship with a powerful buyer founded on
and functions. Being placed in a position where the sup- superficial trust provides temptation for the abuse of
plier is not able to cope with buyer demands is likely to the relationship that is injurious to the health and the
result in even more pressure being applied by the buyer, longer-term well-being of the buyer and supplier orga-
which creates further difficulties for the supplier. Thus, a nizations. Thus, although powerful buyers may be tempted
vicious spiral of negativity emerges, the effects of which to use their position to extract superior outcomes for
become potentially more disastrous with each twist of themselves, this may lead to a situation of ultimate
the spiral. Furthermore, as part of this spiral, the type of destruction.
trading liaison referred to above prevents the supplier
organization from having a direct relationship with the The Buyer-Supplier Partnership
market. This in turn prevents the development of a Before proceeding to investigate the organizational
strategic overview and reinforces dependencies. health of the companies described in the subsequent
exploratory case study, it is important to provide a ratio-
Meanwhile, the powerful buyer may initially appear
nalization of the extent to which a partnership relation-
unaffected by the ill health brewing within the supplier
ship exists between the buyer and supplier organizations.
organization. However, it is inevitable that the difficulties
McIvor et al. (1997) identified a number of key factors
experienced by the supplier will impact upon the buyer
that influence buyer-supplier relations where partner-
itself in the form of, for example, delayed deliveries and
ship sourcing exists. These are outlined in Table I with
product quality problems, all of which ultimately affect the
supporting evidence relating to the relationship with
overall health of the buyer. Thus, such a buyer-supplier
the powerful buyer, referred to as Company X. This table
relationship is inherently problematic and displays all of
also outlines linkages between buyer-supplier collabora-
the hallmarks of a “partnership” where there is a lack of
tion and elements of organizational health.

The Journal of Supply Chain Management | Spring 2003 17


Buyer-Supplier Relationships and Organizational Health

Table I
PARTNERSHIP CRITERIA WITH CHARACTERISTICS FROM THE CASE
ORGANIZATION AND ORGANIZATIONAL HEALTH
Partnership Criteria Characteristics from the Supplier Relation to Characteristics of
Case Organization Organizational Health
Rationalization and consolidation of the Deep relationship with Company X Trust and cooperation between
supplier base (Ellram 1991). Improved developed over a period of 10+ years. individuals and organizations (De Vries
and deepened supplier relationships Increased business with Company X. and Miller 1984; Cooper and Williams
(Gadde and Hakannson, 1994). High level of contact with Company X. 1994).
Supplier involvement in design and Extensive collaboration in product Frequent meetings and consultations
product development (Sako et al. 1994; design and development. (Newell 1995; Miller and Dess 1996).
Bonaccorsi and Lipparini 1994).
Bi-directional communications between Extensive bi-directional communications; Extensive inter- and intra-organizational
buyer and supplier focusing on key telephone calls; faxes; e-mails; meetings. communication across the hierarchy
aspects of partnership (Ellram 1991; focusing on the development of rela-
Spekman 1988; Williamson and Ouchi tionships, functions, and processes to
1981; Richeson et al. 1995). enhance efficiency and effectiveness
(Senge 1991; Pettigrew and Whipp
1991; Heriott and Pemberton 1995).
Focus on supplier development Members of organization worked with Joint decisionmaking in relation to
(Leenders 1989). buyer in own and in Company X’s employee development and structural
organization. Structural change to change (Miller and Monge 1986;
create alignment of organizational McHugh 2001).
structure with that of Company X.
Strategic supplier management Long-term management compatibility. Effective leadership and compatible
(Ellram 1991). organizational cultures (Huey 1995;
Johnson 1995; McHugh et al. 1999).

Taking into consideration the factors that influence strategic business units (SBUs). Unlike positivist research,
buyer-supplier relations as outlined by McIvor et al. however, the analysis of case study data is essentially
(1997), the above discussion aims to illustrate that the interpretative and inductive. From the qualitative data,
relationship that existed between the supplier organiza- narratives or stories are developed that are examined for
tion and Company X was a partnership. Further support patterns. From these patterns, inferences are drawn that
for this argument is offered by Boyle (1994), who pro- yield propositions and can lead to specific hypotheses.
vided detailed case study evidence outlining the extent Such hypotheses can then be tested in other situations
of the partnering relationship between Company X and and indeed, if sufficiently specific, can be tested via the
the supplier. more traditional survey methods of social science.

CASE STUDY METHODOLOGY A MEASURE OF ORGANIZATIONAL HEALTH


Management research is characterized as being soft, Within the larger study that examined links between
applied, and divergent and is undertaken in complex different aspects of organizational health referred to pre-
organizations that exist in a dynamic environment viously, financial indicators were used as the only tangible,
(Tranfield and Starkey 1997). This makes it very difficult objective measure of organizational health. It is acknowl-
to apply the more traditional positivist approach with edged that the use of financial indicators may provide
its emphasis on replication to test for validity. As a con- an inadequate picture of organizational health. However,
sequence, a great deal of research in the management in the absence of any other tangible objective measures,
of organizations makes use of the inductive case study they were used as a basis upon which to judge organiza-
approach (Yin 1984; Bourgois and Eisenhardt 1988). tional health and select organizations for participation
The single case study approach as used in the present in the research. The financial ratios used to assess sup-
exploratory study provides great richness and multiple plier performance over a four-year period included: return
perspectives of the many managers involved with regard on capital employed; sales per employee; gross profit
to the data collected and is thus largely qualitative in margin; sales per pound of assets; return on sales; the
nature. Although a single case in the sense that it exam- acid test ratio; speed of stock turnover; debtors’ collec-
ines in detail the relationship of a supplier organization tion period; creditors’ payment period; and return on
and its buyer, multiple methods were used to collect shareholders’ funds. Taken together, they were consid-
data from individuals within two semi-autonomous ered to provide a relatively comprehensive picture of the

18 The Journal of Supply Chain Management | Spring 2003


Buyer-Supplier Relationships and Organizational Health

Table II
FINANCIAL DATA FOR A FINANCIALLY HEALTHY SUPPLIER ORGANIZATION, YEARS 1-4
Year 1 Year 2 Year 3 Year 4
Return on Capital Employed 25% 18.25% 14.13% 12.43%
Return on Sales 6.13% 5.13% 4.38% 3.94%
Sales per Employee 31,881 31,107 32,581 37,036
Gross Profit Margin 21.25% 22.5% 15.25% 17.25%
Sales per Pound* of Assets 3.06 2.21 2.76 2.7
Current Ratio 1.97 1.15 1.98 2.07
Acid Test Ratio 0.81 1.82 0.57 1.02
Speed of Stock Turnover 6.9 6.73 6.98 8.83
Debtors’ Collection Period 42.25 48.87 25.37 35.4
Creditors’ Payment Period 92.87 156.25 70.5 76.75
Return on Shareholders’ Funds 22.5% 19.25% 17.62% 16.5%

*This study, conducted in the United Kingdom, employs the British pound (£).

organization’s financial health (Chakravarthy 1986; Woo with a desire to respond more efficiently and effectively to
and Willard 1983). The financial records of the supplier the buyer’s demands, a decision was made to restructure
company revealed that it had enjoyed high levels of suc- and divide it into three divisions, each of which would be
cess for a number of years; these are summarized in Table relatively autonomous reporting to company headquar-
II. To preserve anonymity, the data have been subjected ters. Company X had a very close relationship with the
to an inflator. Although subject to a degree of competi- organization. This relationship was fostered by daily con-
tive pressure, the company had performed better than tact with Company X involving people at all levels and all
many industry rivals (ICC 1998). divisions of the supplier organization. This contact aimed
to ensure that the supplier organization responded in a
ORGANIZATIONAL PROFILES positive fashion to the demands of Company X. These
The supplier organization is a large clothing manufac- demands were becoming ever more ambitious and aimed
turer in Northern Ireland that employs in excess of 3,000 to simultaneously achieve higher standards, lower prices,
people. The company has three divisions, each of which shortening leadtimes, and reduced product cycles.
operates as a semi-autonomous strategic business unit
(SBU) manufacturing different clothing products for the DATA COLLECTION TOOLS
same customer, Company X. The latter is a highly suc- As part of the study that was concerned with the health
cessful large, U.K.-based multiple retailer that has a pres- and well-being of individuals and organizations, initially
ence in all large cities and towns in the region. Until the a stratified random sample of 87 individuals spanning
mid-1990s, it performed at a consistently high level, the organizational hierarchy was selected and asked to
returning large profits on an annual basis. The policy complete the Cultural Audit and the General Well Being
of the company has been to establish a partnership Questionnaire (GWBQ) (Fletcher and Jones 1993; Cox
relationship with its suppliers, seeking to build deep-
ening relationships over a prolonged period of time.
This is evident in its trading relationships with suppliers Table III
across a wide spectrum of products.
SUMMARY PROFILES OF THE
Within the supplier organization, the majority of PARTICIPATING ORGANIZATIONS
employees are female operatives engaged in routine
Unit within SBU I Unit within SBU II
production work. Within the organization’s overall divi-
sional structure, each of the SBUs had a different man- No. of Employees 221 235
agement team that worked independently. Furthermore, Product Leisurewear Outerwear
each was engaged in the manufacture of different prod- Customer Group One Large Multiple* One Large Multiple*
ucts and operated a different system of production. Within Structure Divisionalized (SBU) Divisionalized (SBU)
the study, data were collected from units within two of
Significant Recent Structural Change Structural Change
the SBUs, the characteristics of which are summarized
Development
in Table III.
System of Production Modular (Team Assembly Line
Prior to 1992, the company was structured on a func-
Based)
tional basis. However, at this time, due to gradual expan-
Financial Health Healthy Healthy
sion and growth experienced by the company, coupled
*Referred to in this article as Company X.

The Journal of Supply Chain Management | Spring 2003 19


Buyer-Supplier Relationships and Organizational Health

et al. 1987). These are two psychometric instruments existed between the organization and Company X as
that, among other things, provide measures of individual outlined previously in Table I. The nature and character-
stress and psychological well-being through four sub- istics of the buyer-supplier relationship were central to
scales: “depression,” “anxiety,” “worn out,” and the analysis of the data at this stage in the study.
“uptight and tense.” High scores on each of these In addition to the 19 interviews held with those who
instruments are indicative of high levels of stress and had completed the psychometric instruments, one inter-
low levels of psychological well-being. view was held with a member of the senior management
The findings revealed that a large proportion (40 per- team within each of the two SBUs. These interviews
cent) of participants achieved scores on the “depression” focused upon management’s perceptions regarding com-
and “anxiety” subscales that were indicative of psycho- pany goals and performance, and the approach adopted
logical distress. Scores for these individuals on the “worn within the organization in relation to strategic decision-
out” subscale were higher than norms for factory workers. making. Once again, although none of the interview
A detailed exposition of the results relating to this aspect questions focused directly on the trading relationship
of the study is not considered to be within the scope of with Company X, on each occasion reference was made
the present article. to the buyer at an early stage in the interview and exerted
Following scoring of the instruments and analysis of a dominating influence thereafter.
the data, a series of semi-structured interviews were held
with a sample of 19 individuals from the two SBUs. This
RESULTS
The interview data was entirely qualitative and the ini-
sample was drawn from the pool of 87 that had com-
tial stage of analysis necessitated the identification of
pleted the psychometric instruments.
themes emerging from the views expressed by partici-
For the interviews, six production workers were selected
pants. These themes form the basis of the subsections
from each of the SBUs; two of these were considered to
outlined below. Analysis and interpretation of the inter-
have obtained low, medium, and high scores on the
view data suggests that each of the participating units
measures of stress and psychological well-being. The
was unhealthy. This state of ill health appeared to be
interview sample also included representatives of other
influenced by a number of factors that stemmed from
occupational groups within the SBUs, including supervi-
its relationship with its very powerful buyer, Company
sors, “quality rovers,” management, and office staff who
X. Within each unit, there appeared to be an obsession
had scored highest on the scales within their employee
with meeting the ever-increasing demands and unre-
group. Those selected were invited to participate in a semi-
lenting pressure exerted by Company X. This is illus-
structured interview with one of the researchers. They
trated in the analysis of results presented below.
were told that the interviews were being held as a follow-
up to the psychometric instruments and that they would Current Organizational Success
aim to obtain individuals’ views and opinions regarding During the course of the interviews, the current suc-
various aspects of work life within the organization. The cess of the organization was frequently attributed solely
interview sample is summarized in Table IV. to its link with its core customer. The importance of
These interviews were semi-structured and followed Company X to the company, and the fact that having X
the same format on each occasion. They aimed to focus as a key customer is a cornerstone of the company’s suc-
interviewees’ thoughts upon issues considered to be rel- cess, was highlighted throughout the interviews. While
evant to the buyer-supplier relationship and the concepts many interviewees mentioned the close association with
of organizational health. In particular, they covered five a major customer as being a factor contributing to the
areas aiming to ascertain the views and perceptions of company’s success, two operatives pointed out that the
individual employees on the health of the organization, company was “very much tied to this customer.”
focusing on features of the partnership relationship that
Pressures Exerted by a Powerful Buyer
In their opinion, it was of paramount importance that
the company managed to satisfy its key customer, but
Table IV they noted that the demands and targets being placed
THE INTERVIEW SAMPLE upon the company were becoming excessively high and
SBU 1 SBU2 exceptionally difficult to achieve. These demands cre-
ated pressures for everyone, but particularly production
Production 6 6
workers who are critical to the organization’s existence,
Supervisors 2 2
a view which was supported by the scores achieved by
Quality Rovers 1 - these individuals on the measures of stress and psycho-
Managerial Staff 1 1 logical well-being referred to previously. Many individuals
Office Staff - 1 achieved scores on these measures that were indicative
Other 1 - of psychological distress.

Total 9 10

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Buyer-Supplier Relationships and Organizational Health

It was often suggested that manufacturing for Company “There are people at senior levels who, I think,
X is a status symbol within the industry, and that other have a detrimental effect upon the company. You
industry players perceive the company as a force to be get the impression that no one knows where we
reckoned with. However, during the interviews it became are going; if they do, they haven’t told us. There
very clear that the company as a whole was subject to are two people at senior levels I respect; the others
the effects of power emanating from its key customer, a I am not so sure about, they don’t listen.”
power that seemed to infiltrate the company and affected These interviewees frequently cited the confused vision
the activities of everyone who worked within it. This is of the chairman and the rather insular views of the senior
illustrated in the comments of a supervisor: management team as being problematic. Thus, the vision
“…our success hinges on the fact that everything held by the top management team seemed full of lifeless
is done right and is done to please Company X. platitudes and devoid of personality (Miller and Dess
X is very hard to please; if the company did not 1996); it did not appear to have a solid, well-founded
have Company X, it would be lost.” point of view about what would make the business suc-
Such views were further reinforced by a number of cessful in the future (Hamel and Prahalad 1994). The
interviewees, with one production worker commenting: authors contend that such leadership behavior is sym-
bolic of poor organizational health and stifles necessary
“X is a major influence on everything that goes
creativity for organizational success in intensely com-
on in the factory. Everything that happens here
petitive environments (Senge 1990; Huey 1994; Hamel
is geared to meet Company X’s standards and is
and Prahalad 1994).
dependent upon Company X.”
In an effort to cope with the intense competition and The Stifling Influence of a Powerful Buyer
the threat posed by the customer being lured by seem- This again may be partly attributed to the relationship
ingly more advantageous trading arrangements with with a powerful buyer that stifled the individuality of the
alternative suppliers, it was evident that the organiza- company and its leadership. It was shielded from changes
tion had focused its attentions on achieving efficiency impacting its external environment, being cocooned
gains where possible. This was highlighted in particular and lulled into a false sense of security. Simultaneously,
by the comments of senior managers interviewed. As a it was being squeezed to an extent beyond that which
consequence of the constant drive toward the achieve- fosters maximum performance and health. Thus, although
ment of enhanced efficiencies, it was the opinion of it may be argued that the existing state of ill health
these managers that employees on the shopfloor were within the organization stemmed from its relationship
subject to ever more ambitious production targets and with its very powerful buyer, this in turn may be influ-
ever-increasing workloads. They suggested that these enced by the apparently weak leadership within the
workloads were reaching unreasonable proportions and company. It was this leadership that led the organiza-
were a source of enormous pressure for individuals. As tion into such a relationship in the first place. It may be
such, it would seem fair to argue that such dependence argued that, once committed to this customer, the role
on one buyer that fosters customer domination is likely and function of leadership within the organization was
to be unhealthy for an organization. This atmosphere overwhelmed by the power and influence exerted by
creates a high-dependency relationship and shields the the customer. Such features of a trading partnership are
supplier organization from any direct impact of change decidedly unhealthy and, it is argued, work to the detri-
in the environment. ment of the buyer and the supplier. This view is further
supported by recent financial performance data for
Powerless Managers
Company X and the case organization. Both organiza-
The quality of top management and the leadership
tions have reported major falls in turnover and profits
provided within the organization was heavily criticized,
over the last two years. Additionally, share prices for
indicating an unhealthy management style which it
Company X have shown a significant decline and both
may be argued was fostered by the relationship with its
organizations have introduced large-scale layoffs as part
powerful customer. Furthermore, it may be argued that
of a restructuring program.
this unhealthy management style adversely affected the
The behavior of the organization and its leadership is
well-being of employees; this is reflected in the levels of
indicative of low self-esteem, whereby both were seem-
stress exhibited by individuals and the views and opin-
ingly trapped in a trading relationship where they were
ions expressed during interviews. Management at the
powerless to act and appeared to have little control over
level of the division was generally held in high esteem.
their own destiny. The organization was more or less
However, the top management team within the com-
acting as a puppet whose strings were very tightly con-
pany was considered by divisional managers interviewed
trolled by a possessive buyer.
to be an impediment to enhanced organizational perfor-
mance; for example, one individual commented:

The Journal of Supply Chain Management | Spring 2003 21


Buyer-Supplier Relationships and Organizational Health

Powerless Operatives structural change was effected within a very short time-
During the course of the interviews, it was evident that frame with apparently little or no consultation with key
lack of participation in decisionmaking was a source of individuals or groups.
frustration for those in operative positions. These indi-
viduals often found themselves implementing decisions Strategic Decisionmaking
that they knew were flawed and costly for the organiza- Poor communication also seemed to characterize the
tion. This lack of participation appeared to be fostered strategic decisionmaking practices within the organiza-
by the often chaotic state that existed within the orga- tion, which weakened the strategy and its implementa-
nization as a result of having to respond very rapidly to tion. The units participating in the study indicated their
sudden buyer demands. As a consequence, the sense of lack of awareness of the company’s strategy and plan for
urgency that prevailed within the units did not permit the future; this was particularly evident in the comments
the necessary time to involve key individuals in the made by the senior manager within one of the units
decisionmaking process. These individuals often suggested who stated that:
that management should have consulted with them due “…in terms of how we operate, you try and get bits
to their in-depth technical knowledge. Operatives felt of information and piece it together like a jigsaw
that they could make valuable, worthwhile contributions and form a strategy for the factory from this.”
and hence, often enhance the quality of decisions. Healthy As a consequence, these individuals were placed in a
organizations foster employee involvement in routine position whereby they formulated a workable plan for
decisionmaking, which is believed to contribute indirectly their own operating unit. Lack of communication
to enhanced organizational performance (Newell 1995; regarding something so fundamental to the organiza-
Miller and Monge 1986). Similarly, the lack of employee tion as its strategy is evidence of management and orga-
participation in routine decisionmaking was yet another nizational behavior likely to contribute to a state of ill
symptom of organizational ill health fostered by the link health for the organization and the individual.
with a demanding buyer.
While lack of consultation was evident in the deci- DISCUSSION AND CONCLUSIONS
sionmaking practices within the organization, it also This exploratory case study reveals the effects that a
extended to significant events affecting the company powerful buyer can have upon the behavior of a sub-
and its employees. Such events included, for example, missive supplier organization. The characteristics of the
the divisionalization of the organizational structure. The relationship that existed between the organizations in
influence of Company X extended to the organization’s this article may be considered strong barriers against
decision to adopt a divisionalized structure, with one building effective relationships between buyers and sup-
interviewee saying: pliers. In particular, the findings reveal a distinct lack of
internal collaborative or cultural alignment between
“…it was better from Company X’s point of view.
levels of the organizational hierarchy within the supplier
X is divisionalized internally in the sense that each
organization. Such alignment is cited as a necessary
department supplied in X acts as a division, so it
ingredient in successful buyer-supplier collaboration
was easier for them to relate to and work with
(Kanter 1989; Burnes and New 1997; Boddy et al. 1998).
divisions here.”
Given the lack of internal collaborative or cultural align-
The lack of consultation concerning structural change ment within the supplier organization, it will be even
left many individuals unsure of how they would be more difficult, if not impossible, to create the necessary
affected by the events, and somewhat annoyed that cultural alignment between buyer and supplier. On the
their opinions were not sought regarding decisions that basis of the evidence presented within this article, the
would change their roles and responsibilities within the nature of the relationship that existed between the orga-
organization. This is reflected in the comments of one nizations may have negatively reinforced the formation
individual who said: of cultural alignment.
“There was a lot of unhappiness in the company The behaviors exhibited by this supplier organization
about the way things were done. A lot was are indicative of a state of ill health and an organization
expected in a very short time; there was little that is being severely squeezed by its powerful customer.
preparation or support.” The supplier was originally selected to participate in the
The poor quality of communication symbolized by this study because of its previous financial performance.
behavior is another feature of organizational ill health. However, it is posited that on some occasions an organi-
As noted previously, the decision to divisionalize was zation may accumulate wealth as a result of engaging in
made partly so that the company could respond more “unhealthy” practices that are short-sighted and likely
efficiently and effectively to its customer. Divisional- to adversely affect longer-term well-being. Some support
ization represents a major change for any organization for this view is provided by the financial data for the
that requires careful management to ensure a successful supplier organization (see Table II). Based upon litera-
transition to the new state. However, in this case the ture on buyer-supplier partnerships and organizational
health, this would seem to be a logical conclusion. It is

22 The Journal of Supply Chain Management | Spring 2003


Buyer-Supplier Relationships and Organizational Health

acknowledged, however, that this case study is essentially highlight a need for buyer and supplier organizations to
exploratory and that further support for the argument is carefully examine the nature and characteristics of the
likely to be provided by a longitudinal study that includes partnership that exists between them. Given the well-
operational issues such as quality levels, throughput rates, established principle that excessive pressure leads to
yield rates, and work-in-progress. dwindling performance (Yerkes and Dodson 1908), it is
The organization that formed the focus of this article important that buyers and suppliers heed this advice.
appears to be caught in a trap presented by its sole cus- Thus, there must be knowledge and understanding by
tomer where the power exerted by the latter would seem both buyer and supplier of the pressure performance
to be a major contributor to organizational ill health. relationship, and the identification of the point of optimal
This is reflected in the declining financial performance of buyer pressure so as to achieve maximum performance.
the buyer and supplier organizations, the restructuring As noted in the introductory section of this article,
program, and reports of conflict in senior management although a powerful partner may be tempted to flex its
within Company X. muscles by exerting excessive pressure on its suppliers,
Although involved in a trading partnership, the cus- it should be aware that such behavior may be costly to
tomer is powerful and in a position to withdraw from itself in the longer term and may lead to unwanted con-
the relationship should a more favorable supplier pre- sequences. Not only is it likely to destroy a happy mar-
sent itself. This is counter to the cooperation and trust riage, but it could sow the seeds of its own self-destruction.
of the partnership relationships referred to by Sako (1992). Building upon the pressure performance relationship
While locked into serving this customer, the organiza- outlined by Yerkes and Dodson (1908) referred to above,
tion’s total efforts are directed toward meeting the ever the link between excessive buyer pressure and buyer-
more stringent demands of the customer. As a conse- supplier performance is demonstrated in Figures 1 and 2.
quence, the customer, in effect, prevents the organiza- The evidence presented within this article indicates
tion from scanning its external environment. This again that the nature of the relationship that existed between
is decidedly unhealthy and would suggest that the com- the buyer and supplier organizations is such that the
pany is unable to make decisions crucial to their own powerful buyer has in fact squeezed the submissive sup-
best interests. Without the constraints imposed by such plier to such an extent that the effects are harmful to
a dominant customer, the company would have had the both sides of the relationship. In terms of the diagrams
freedom to choose its own direction and the means by presented, the pressure exerted by the buyer on the sup-
which it would pursue its own goals. This aside, how- plier has gone beyond the optimum point, leading to a
ever, given the comments regarding the quality of lead- decline in performance.
ership and the characteristics of the senior management The findings presented highlight a number of issues
team within the organization, one must question if the that have implications for management practice in fos-
organization would have been well placed to identify tering improved organizational health within buyer and
appropriate goals and implement optimal methods of supplier organizations. More specifically, it would seem
goal achievement. that in order to reap the benefits of partnership, buyer
The influence of Company X was omnipresent and all and supplier organizations must interact in a way that is
developments, decisions, events, and activities that took mutually respectful, and where the relationship exhibits
place within the organization were a response to the characteristics of true win-win partnerships; this supports
endless stream of demands made by the buyer. The inter- the underlying principles of partnership outlined by
views revealed that these demands were reaching unrea- Lamming (1993). To facilitate effective strategy imple-
sonable proportions and so it would seem that the level mentation, it is imperative that the “right” relationship
of influence, power, and control exerted by the buyer is established between buyers and suppliers. This high-
was in itself unhealthy, and was fostering a state of ill lights a need for strategic and cultural alignment between
health within its trading partner. Thus, the supplier was buyer and supplier and a rejection of behavior and prac-
trapped in the middle of the vicious spiral of negativity tices that aim to selfishly satisfy individual components
referred to previously. While this has potentially disas- of an organizational network as described by Cox (1996).
trous consequences for the supplier organization, it is It would seem essential that communication structures
equally likely to have a negative effect upon the buyer. that promote dialogue, consultation, and employee par-
If the supplier organization is itself in a stressed situation, ticipation in decisionmaking be promoted. This is par-
its resultant behavior manifests itself in ill-conceived, ticularly important where decisionmaking could benefit
time-urgent decisionmaking, poor management practices, from the in-depth technical knowledge of middle and
and frustrated employees who are constantly under junior managers and shopfloor workers. The findings
pressure to meet overly ambitious targets. It follows that show that senior management within the company
such behavior is likely to have negative repercussions have made a strategic decision to supply solely to
for the buyer. Company X. Strategic decisionmaking within the com-
In the interests of fostering a state of organizational pany appeared to be “inward-looking and closed,” influ-
health, the arguments put forward and findings presented enced only by the views and opinions of a small team

The Journal of Supply Chain Management | Spring 2003 23


Buyer-Supplier Relationships and Organizational Health

Figure 1
The findings presented suggest that in creating and
THE PRESSURE/PERFORMANCE RELATIONSHIP fostering a state of health, supplier organizations must
aim to move away from a position of domination by
a single customer, where they are under the spell of a
Optimum pressure point powerful buyer. If the latter is unavoidable, then it is
High
essential that the consequences of being caught in a
trap set by a powerful buyer are acknowledged, with the
organization’s leadership and management seeking to
develop contingency plans and strategies, and/or fos-
tering the creation of a more equitable and symbiotic
Performance partnership. Consequently, the supplier organization
will become a more active player that takes increased
control over its own destiny, rather than being a passive
recipient that seems powerless to change circumstances
that appear to shape its behavior, and ultimately its
performance.
Low
This article has presented some findings from what is
Low High essentially the first stage in a long-term research program
focusing on the nature and characteristics of buyer-supplier
Levels of Pressure
relationships and their relationship to organizational
health. In developing the work further, the propositions
presented are likely to be strengthened by future planned
Figure 2 work that will adopt a more quantitative approach,
employing a survey methodology to test the relationship
THE BUYER SQUEEZING/SUPPLIER RESPONSE RELATIONSHIP between buyer-supplier relationships and organizational
performance measures. While this provides an indication
of the direction of future research work, it is argued that
Optimum pressure point — the present article presents a new and hitherto unex-
High “ideal“ buyer-supplier relationship plored way of conceptualizing the buyer-supplier rela-
tionship and implications for organizational well-being.
Case organization
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The Journal of Supply Chain Management | Spring 2003 25


International Federation of Purchasing and Materials Management

9th IFPMM Summer School on


Advanced Purchasing Research
August 6-11, 2003, Salzburg, Austria

The first IFPMM Summer School was the first six schools have been published
organized nine years ago. Seeing the by IFPMM under the titles:
success of the first event, the Federation – Emerging Issues in Purchasing and
decided to arrange annually this opportu- Supply Chain Management (1997)
nity for an intensive working together of
– Research Perspectives in Purchasing and
talented young scholars from all around the
Supply Chain Management (1999)
world, with some of the leading professors of the field.
– Purchasing and Supply Topics at the
At the seven schools we have had 88 students from 21 coun-
Turn of the Millennium (2001)
tries in Europe, North America, Asia, and Africa. Three vol-
umes of the papers presented by students participating in All the seven schools were organised in Salzburg, which
has proven to be an ideal location for the event.

OBJECTIVE PROFESSIONAL PROGRAM


The Summer School is intended to serve the following objectives: The professional program starting on August 7, 2003, will consist
• to help participants define relevant research topics and pow- of four elements:
erful research methods; 1. Presentation and discussion of research subjects delivered by
• to provide a forum for talented young scholars from various invited speakers. These sessions will be directed by internationally
regions of the world to exchange ideas and establish a research acknowledged scholars, who will present a topic on his/her own
network; research field and discuss with the students possible approaches
and methods to handle the subject. Invitations are in progress
• to promote the profession of purchasing and materials manage-
and a full list of speakers will be released in May.
ment by contributing to the creation of high standards for dis-
sertations by the participants. 2. Presentation and discussion of research papers prepared by the
school participants. Papers submitted will be distributed among
PARTICIPATION participants and the discussions will be led by invited professors.
Participants may come from any country provided that they meet 3. Practitioners’ presentations of hot issues in purchasing and related
the following requirements. They must be: management areas. These presentations shall be of orienting type
• enrolled Ph.D., postgraduate (or advanced graduate) students of and will be given by invited speakers.
an accredited institute of higher education; 4. There will be some methodological discussions and group exer-
• in the process of writing a dissertation based on original research cises, in order to help the participants’ research and teaching
on purchasing or a closely related area (materials management, skills.
logistics, supply chain management, etc.); PARTICIPATION FEE
• fluent in English and willing to take an active part in discus-
IFPMM is the main sponsor of the project, but contribution is
sions in that language;
expected from other organizations as well. This assistance makes it
• able to present a letter of recommendation from one regular possible that the participants only have to pay a nominal fee: CHF
faculty member of the institution they are enrolled in. 1000. This fee should be sent to the bank account of ISIR/HALPIM,
A strong preference will be given to those students who can pre- account number: 501-00219-2100-4029 Hungarian Foreign Trade
sent a paper for discussion at the summer school. The paper must Bank Ltd., H-1821, Budapest, Váci u. 38., Hungary. The participa-
be mailed to the School Secretariat not later than June 15, 2003. tion fee includes accommodation (in single rooms with shower),
Applications should be sent to the IFPMM Summer School three meals a day (starting with a dinner on Wednesday, August 6,
Secretariat and the national member associations of IFPMM in the ending with lunch on Monday, August 11), refreshments and all
country where the applicant is enrolled in school. Applications from materials. Travel, extra nights and extra costs for a double room
those countries where such association does not exist can be sent to must be arranged and paid for individually. Please note: the profes-
the School Secretariat only. sional program starts in the morning of August 7.
Applications will be processed in the order of arrival to the School In exceptional cases, applicants can apply for a reduced participa-
Secretariat, and the first 20 applications meeting the above require- tion fee. This application should be sent both to the national member
ments and considering the said preference will be accepted. association and the School Secretariat.

Contact for information: Professor Attila Chikan • Past President of IFPMM • c/o HALPIM Secretariat • Veres Pátné u. 36.,
Budapest, Hungary, H-1053 • Phone and Fax: (36-1) 317-2959; 266-4673 • E-mail: chikana@axelero.hu, halpim@mercur.bke.hu