Supplier-Supplier Relationships: Why They Matter

In the rush to build that critical relationship with suppliers, it’s easy for purchasing managers to forget that their suppliers have relationships with each other, too. Knowing the types of supplier-supplier relationships you are likely to encounter and what they will mean for your business is the key to maintaining an efficient supply chain. Here are three general categories that cover many such relationships.

By Thomas Y. Choi -- Supply Chain Management Review, 7/1/2007

This information is from an article appearing in Supply Chain Management Review by Thomas Y. Choi.

In this relationship, perhaps the most common, suppliers are primarily concerned about vying for the buying company’s limited spend for each buying category, such as new contracts. To this end, suppliers withhold information from each other, and try to keep each other at bay. This situation creates what is typically known as information asymmetry—one supplier having comparatively more information than the other, or suppliers simply having different types of information. In this relationship, there is usually a winner and a loser.

When suppliers are engaged in a competitive relationship, the buying company can readily maintain leverage over them. It enjoys power over its suppliers, on the one hand, by controlling the information given to each supplier and taking advantage of the information asymmetry between suppliers. On the other hand, the buying company may miss out on potential synergy between suppliers and may need to incur high administrative and transaction costs.

In a cooperative relationship, suppliers work together toward a common goal, and there is a better chance of the suppliers working together. Information needs to be shared between suppliers to the extent it facilitates meeting the common goal. They may be developing a new product or new technology together. Or they may be sharing their production capacities together. Sometimes, the common goal is prescribed by the buying company or some other times the suppliers create it on their own as a response to some actions taken by the buying company.

In a cooperative relationship, the buying company may gain from the information and knowledge sharing between suppliers and be able to meet the desired goal that benefits the company. Suppliers can share production capacity and technological capability. However, in a cooperative relationship, there is always a chance for supplier collusion and a threat of the suppliers’ capabilities evolving to the point where they actually become competitors on the same level as their buyers. In other words, when suppliers work together, they can collude to withhold information from the buyer or even distort the information. Also when they accrue enough know-how about the buyer’s business, they can move in on the buyer’s territory and start competing.

Lastly, in a co-opetitive relationship, suppliers compete and cooperate at the same time. Here, suppliers have not settled into a single mode of either competing or cooperating—rather, they are in an unsettled state of competing and cooperating concurrently. They compete directly against each other for self-preservation, but they cooperate in a guarded way when it shows mutual benefits such as to share technology or expand the market.

In a co-opetitive relationship, the buying company can gain the advantages of both competitive and cooperative relationships. Nonetheless, in this mixed relationship context, there is certain level of relationship uncertainty. No one may know for sure whether the present co-opetitive relationship may tip over one way or the other, and there is the risk of suppliers’ opportunistic behaviors. Once they get to know each other, at least some of them might continue to talk to each other without telling the buyer.

Thomas Y. Choi is a professor of Supply Chain Management and Faculty Director of the Global SCM Certificate Program at Arizona State University.

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