Today's strict security initiatives make supply chain relationships much more complex—and the job of the supply chain professional much more demanding. The implications are particularly evident in international freight movements. Tighter security inspections at ports can significantly increase transit times and inventory-carrying costs. New U.S.-government mandated measures aimed at thwarting the terrorist threat—like the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Container Security Initiative (CSI)—call for a whole new level of diligence and compliance. Throw into the mix a dramatic increase in offshore outsourcing and the emergence of the extended supply network concept, and the security challenge becomes all the more daunting.

In this new global environment, the central question for logistics and supply chain managers is this: Where do we start the process of managing and controlling the security of our supply chains? Clearly it's not economically feasible to inspect every single container. A more practical—and still effective—place to start is with your suppliers. Given the levels of security mandated by government authorities today, companies can gain real operational and economic value from selecting suppliers that can provide effective and efficient security. They can achieve significant advantages from developing trustworthy arrangements with suppliers that meet tough criteria in such key activities as selecting security-conscious carriers, shipping via secure ports, meeting packaging security requirements, and providing background information on key personnel.

But to develop these kinds of arrangements and thereby minimize their supply chains' exposure to external threats, companies first need to understand the types of relationships that they have with their suppliers. Based on this understanding, they can then more easily factor security considerations into their supply chain strategy.

They need a framework to help them understand those relationships—an evaluation system that segments suppliers so supply chain managers can better predict which freight movements engender which security risks. This article lays out a model for such an evaluation framework, based on our research into the new security requirements and our observations of customer-supplier behavior. It begins by defining the key characteristics that differentiate what we have identified as seven types of relationships. The article then defines each relationship, tying each to suggestions for security protocols based on the characteristics and possible risks associated with each type of relationship.

Before managers can properly evaluate their companies' supplier-customer relationships or select a security protocol for the relationship, they must be able to identify the elements that differentiate one relationship from another. The three most critical elements are (1) the perceived level of trust between the parties, (2) the level of interaction between them, and (3) their commitment to the relationship.¹ The key for supply chain professionals is to think about the specific questions that will help to classify each relationship. The series of statements in Exhibit 1 provides the prompts for those questions. A manager can gauge how much he or she agrees with each statement in the context of his or her knowledge of the other party. The supplementary framework in Exhibit 2 offers statements that relate to a company's implementation of security strategies that help pinpoint potential terrorist activity in the supply chain.

All of the relationship elements work on two different levels. One level comprises the personal connections between the individuals who interact and manage the relationship (such connections surface in both business and social settings). The second includes organizational influences, which may or may not be aligned with the personal connections. These organizational influences are dictated by the strategies created at the corporate level. For example, corporate policy may lean toward limited credit availability, which can strain relationships between the supplier and customer. However, the personal relationship between the supplier's salesperson and the customer's purchasing manager can improve the relationship beyond the constraints of the organizational influences. We will address both levels as we look at each of the three main relationship differentiators.

The first nine statements in Exhibit 1 address the personal and organizational considerations of trust. The first four statements in Exhibit 2 help assess how much the company trusts its supplier to handle the security-related responsibilities of movement control, packaging, and documentation.

At the personal level, trust lets each party gain confidence that the other will do as it expects. Managers must look at personal trust from three angles. How honest is the other party when dealing with me? How openly do they share aspects of their involvement in the relationship? And how reliable are they when it comes to matching words with deeds? Personal trust can be hard to establish when businesses source aggressively from afar. If a company uses a reverse auction and the winning supplier is overseas, it's unlikely that the individuals on each side will get to know each other personally. In these cases, the feeling of trust at the personal level will be lower.

In terms of the supplier's organizational structure, the core question is whether the supplier consistently meets the customer's needs. Is the supplier's organization truly dependable, and can the supplier be flexible enough to accommodate significant changes? Here, trust implies that the supplier has both the resources and the skills to implement those resources to benefit the relationship. If an organization assigns specific assets to a relationship, it can positively affect how the other party views its willingness to pursue or continue the relationship.

In highly successful supplier-customer relationships, the parties interact frequently at many levels and the volume of transacted business can be significant. At the personal level, the frequency of communication affects each party's perception of the value that can be created through its business transactions. Nuances in the information-sharing process provide each party with cues about what the managers consider important to their organizations and to the relationship. Statements 10 and 11 in Exhibit 1 address information-sharing aspects, gauging not only the parties' abilities to swap information face-to-face and through electronic channels but also their intent and efforts to do so. Statement 5 in Exhibit 2 points to how often the parties communicate specifically on security-related matters.

At the organizational level, frequency is characterized by the amount of business transacted. A customer experiencing increased demand can strengthen ties with key suppliers by having more frequent deliveries and guaranteed product availability. (See statements 12 and 13 in Exhibit 1.) It's assumed that a strong supplier-customer relationship is more likely over time if the supplier and customer develop common operating procedures aimed at enhancing operating outcomes. These outcomes can result in benefits for both parties—such as contractually guaranteed business volumes that enhance the competitive positions of both sides. And because formal contracts can help establish and underpin those expectations, they should be a core element of supplier-customer agreements.

Finally, customer-supplier relationships can be classified by the commitment level — or how dependent the customer is on the supplier. We define "dependence" as the situation where one of the parties does not entirely control all of the conditions necessary to achieve an outcome it desires.² In cases where the customer appears to be dependent on the supplier, three critical factors are at work: the importance of the product or service being exchanged, the extent to which the parties have discretion over the exchange, and the extent to which the parties have alternative supply sources or market outlets. Customers are less likely to try to take advantage of a primary supplier that they are dependent on. However, suppliers that have greater control over their customer's decisions may be more opportunistic and self-serving when making decisions that affect both sides. A customer may choose to guard against this possibility by limiting its business with the supplier. The customer's pursuit of other business connections, however, will come at the expense of the existing relationship.

It's critical to understand the concept of dependence and its effect on different types of relationships. Statements 14 to 17 in Exhibit 1 sketch out some of the dependence story, addressing personal considerations such as perceptions of the relationship's cost/benefit dimensions, the market alternatives, and the ability to use the relationship to attain company goals.

Organizational investment in the relationship can be declared in the form of money, facilities, personnel, equipment, management's time, and so forth. Longer-term relationships tend to display a willingness by both parties to commit a variety of different assets to future transactions. Statements 18 to 22 in Exhibit 1 can help assess both parties' commitment level. Statements six and seven in Exhibit 2 address the supplier's level of commitment or investment in security measures.

Using these elements, we've analyzed a large number of existing business relationships over several years and developed an effective relationship classification system.³ This system consists of seven unique combinations of the three elements. Logistics and supply chain managers can use this framework to gauge the types of supplier relationships they have—and then determine the right security strategy for each.

We have identified seven types of supplier/customer relationships that have unique characteristics. At one extreme are interactions where neither side places much trust in the other, where they have infrequent contact, and where the parties perceive that they do not have much commitment to the relationship. By contrast, there are relationships where the parties feel that they trust one another, where there is abundant interaction between them, and substantial commitment.

Exhibit 3 gives a three-dimensional view of where the seven categories fit along the dimensions of trust, interaction frequency, and commitment. Each dimension has a 1-7 scale, and the scales can be linked by category to the questions in Exhibits 1 and 2. For example, if your average response to the questions about trust places you at less than or equal to 4 on the 1-7 scale and if the averages of the interaction frequency scale and the commitment scale are also less than or equal to 4 in each case, then the relationship is what we classify as a "nonstrategic transaction." At the other end of the range, if your evaluation comes up with scores of 5 or above on all dimensions, then you are describing an "alliance." The type of relationship should dictate the level of control you need to manage logistics activities between your facilities and those of your supplier. Let's look at each relationship in turn.

These relationships are not necessarily one-time transactions, but they do typically involve many commodity exchanges and first-time transactions between suppliers and customers. In these situations, it's common for the parties to feel little obligation to each other as alternative sources of supply or market access are readily available. For this reason, discussion has focused on using electronic exchanges, typically Web-based, to drive out transaction costs in such relationships.

At the personal level, there is little on which to base a relationship—no doubt due in part to the limited communication between the parties. Indeed, there is little reason for a relationship to evolve, and an arms-length approach may dominate negotiations. Organizationally, a nonstrategic relationship may form simply because there are few transactions between customer and supplier; that's the case with purchases of high-value capital equipment, for example. Alternatively, the relationship might involve multiple transactions but in a highly competitive market, creating substantial revenues and volumes.

So what does this mean for supply chain or logistics managers? From a security standpoint, it is highly advisable to maintain control of all logistics aspects of nonstrategic relationships whenever possible. For example, if material is being sourced from Malaysia from a supplier that the customer does not know well, the contract terms should stipulate "free on board (FOB) origin-freight collect," which allows the customer to control all aspects of logistics activity after the shipment leaves the supplier's dock. Additionally, less familiar shipments can be routed through specific ports that are better able to accommodate more detailed customs inspections. For example, the Port of Rotterdam can X-ray complete containers, which may expedite security clearances when the contents of containers are not known to the shipper. By pegging the relationship with the supplier as a nonstrategic transaction, supply chain managers can help flag the cargoes that will call for greater levels of scrutiny.

These are also fairly casual arrangements, but in this case one party does more with using informal influence strategies to try to manage the relationship. Relative to the six other types of relationships, administered relationships exhibit the lowest concern for the personal character and capability of the other party. At the organizational level, they do not reflect significant business volume or investment. However, the dimensions of communication frequency and the individual's perception of dependence on the other party are greater than is typical of the other forms of relationship. An example of this would be when firms use procurement cards to expedite the buying process and encourage a more "automatic" transaction process, similar to when consumers make decisions about airline reservations based on frequent flier programs. The practice increases the number of transactions, even though each transaction may be for limited volumes of business, and there is a very limited personal relationship between the supplier and customer.

While these relationships have something in common with nonstrategic transactions, they do require some modest investments, such as in suppliers' online catalogs. Some companies will use supplier development meetings or distributor councils as mechanisms to influence the other party's actions. In administered relationships, one party can offer the other levels of merchandising support, for instance, or business process consulting. A good example would be a company that helps to facilitate improved operations for the supplier or customer through supplier development programs, or in distributor-retailer relationships requiring assistance with product merchandising.

Compared to nonstrategic transactions, administered relationships can help the customer predict more effectively the level of security risk in goods movements. For example, although each party may have relatively limited knowledge of the other, they may be able to allow lower levels of inspection at hand-off locations as long as they can be sure about the freight's point of origin. A logistics manager who knows that his or her company is in an administered relationship could, for instance, decide to route freights automatically through Rotterdam because that port is set up for streamlined container security checks. In other words, instead of being so sensitive to security assessment issues, supply chain managers could route shipments based on location and distance factors.

Contractual relationships reflect the need for formal control over business activity between suppliers and customers. Relative to the other relationship types, contractual relationships are characterized by modest levels of communication frequency and perceived dependence. At the organizational level, then, managers recognize a strong supply- or market-based need for the relationship because of the volume of business conducted with the other side. But they do not desire to raise the level of required investment in the relationship. While there's some call to forge and maintain personal relationships — perhaps as an outcome of the contract negotiation process — it is not a major feature of contractual relationships. In fact, a formal contract reduces the need for direct communication between boundary-spanning personnel and, therefore, reduces interaction frequency. In other words, the contract terms, if written clearly, can substitute for multiple direct interactions. (An important point to note: Not all contract-bound relationships fall into this category. Formal contractual characteristics show up in all seven of the relationship types.)

In contractual relationships, there is a higher level of trust in the supplier than is typical of nonstrategic transactions and administered relationships. The contract terms can specify broad areas of responsibility for the supplier, which allows greater flexibility to negotiate shipping terms that can take advantage of the supplier's logistics capabilities rather than depending solely on the customer's capabilities. For example, the supplier may have access to deadhead freight lanes between the consignor's dock and the port at the country of origin and can significantly reduce total freight costs for an international movement. However, this opportunity may not have been available if the consignee handled the responsibility for freight. Greater trust and commitment can create opportunities not available in more transactional situations. In short, the contractual classification gives suppliers greater control over shipment characteristics that can minimize security breaches as the freight moves through hand-off points around the world.

Joint ventures generally involve some form of financial investment by one party in the other. They are characterized by significant interaction frequency and commitment to the relationship but limited perceived trust in the other party. What differentiates joint ventures from contractual relationships is that they comprise significant levels of investment (the significance is specific to each company) with more marked perceptions of mutual dependence.

Because joint ventures generally feature slightly lower levels of trust—as evidenced in the low levels of confidence in personal character and organizational capability—the parties use the investment levels to ensure adequate performance and control over the relationship. In other words, the investment occurs because there is a lack of trust in the other party. For example, a manufacturer may jointly invest in production capacity overseas to build a specialty product in which it has little expertise. The other party has the expertise but is not especially interested in expanding its capabilities; however, it is willing to do so because of the investment made in the relationship. The "lead" manufacturer's lack of trust may cause it to invest in the joint venture to secure the other party's commitment.

The fixed obligations of a joint venture investment can add constraints, though. For example, predetermined facility locations can limit the range of logistics alternatives. In turn, that may create greater dependence on the supplier and consequently limit the options that could be considered satisfactory in terms of security issues. Parties in joint venture relationships must be keenly aware that their suppliers may not factor security into their decisions as much as they might like.

These relationships involve the exchange of unique products or services in the relatively rare circumstance when the customer has few supply alternatives. Although the parties have a fairly limited commitment to each other, there is a strong perception of trust that permits a less formal foundation for conducting business than in other exchange situations. These relationships rely on one-to-one interactions between the two organizations.

Because the customer places significant trust in the supplier, its logistics managers can accept disadvantageous freight terms (such as FOB destination — freight prepaid) that give the supplier control of the freight movement and responsibility for the applicable security obligations. Some logistics managers may not view this as ideal if they see it as giving the supplier complete control of all movement decisions. But it can work. By assessing the relationship characteristics, managers can gain confidence in movement security even when there are few or no stated requirements to define who controls the logistics and how. While control of global logistics activities is very desirable, it is not always easy to achieve in today's era of outsourcing. Established business relationships can give customers greater confidence that reduced control can still work in specialty contract relationship circumstances.

This term is used so freely that it is very often misinterpreted. A true "partnership" is actually a relatively uncommon form of relationship. In partnerships, the parties may not interact frequently but they do have a deep and enduring trust of one another as well as a strong commitment to the relationship. A simple example might be a supplier of a critical component making weekly just-in-time deliveries straight to a manufacturer's dock or depot.

In a partnership, the parties have limited control over each other based on volume of business transacted. However, the customer perceives a greater level of commitment to the relationship. Consequently the customer may be even more dependent on the supplier's contributions to logistics performance than, say, in the specialty contract relationship situation. Given the high level of trust and limited-volume circumstances of a partnership, it is easier for managers to allow suppliers to control security activities.

Alliances reflect significant trust, interaction frequency, and commitment to the relationship. Although they can and often do involve some form of investment by one or both of the parties, they reflect a different rationale for doing so than joint ventures. In joint ventures, the investment is the result of a paucity of trust. But in alliances, the investment occurs because the parties believe the relationship can be strengthened beyond what they have already achieved by trusting each other.

Relative to the other relationships, alliances indicate a high level of confidence in the personal character of the other party, along with more frequent communication. In a typical example, a manufacturer might invest in storage facilities with a third-party logistics provider (3PL) so the 3PL can achieve maximum efficiencies in providing either inbound or outbound services for the manufacturer. Both parties recognize the benefits of the new efficiencies; the trust between the parties enhances the existing relationship.

The elevated levels of trust make it far easier to implement logistics strategies. There is great potential for flexibility given the large transaction volumes typical of alliances. For example, the customer may be more agreeable to the idea of giving up logistics control to the supplier. Or the parties may recognize that it's more advantageous to both sides if the customer controls the logistics processes. In such situations, terms of FOB destination-freight prepaid can make sense, because they reduce the customer's commitment to movement responsibilities. Further, security concerns are not jeopardized because of the positive relationship between supplier and customer. In alliances, the close nature of the relationship on all levels can foster exchanges of personnel between organizations to enable the logistics activities that can enhance security and sustain consistent flows of cross-border freight movement.

Supplier-customer relationships today are often driven as much by security concerns as they are by timeliness, product quality, or historical connections. The global security focus following the terrorist attacks in the United States, Spain, and elsewhere has added considerable complexity to the planning and execution of logistics strategies. To a large extent, the focus on security flies in the face of the growing need for logistics flexibility.

The implications for supply chain managers are many. As it is, too few of them accurately assess their level of power or dependence in their supplier relationships. In addition, they must now acknowledge and accommodate the new security constraints on supplier relationships—even if it means breaking long-time links. Supply chain managers will be quite within their rights to replace any suppliers that cannot meet the new security standards—or those that simply refuse to do so. In fact, it will be mandatory for companies to make those calls.

We have presented a theoretical framework for classifying supplier-customer relationships to help companies factor security issues more easily into their logistics strategy decisions. By considering the characteristics of your business relationships and connecting the results of that inquiry to your supply chain's security risks, you can adapt your logistics strategy to fit the new security realities. Put simply, not all business relationships are created equal, so they don't warrant equal attention and focus on security. Our classification model and its associated tools give planners a way to determine rationally the relationship type and how much emphasis should be placed on security given the typical characteristics of that relationship type.

We do not pretend that we have devised a universal solution, and we welcome constructive dialog that can help enhance the model. But we believe its application will help many companies weave security considerations more tightly into their supply chain decisions. And if that reduces external threats of terrorism and helps streamline logistics costs, then the time spent working with the framework will be time well spent indeed.