The paradox of supplier development in technology-based luxury supply chains

This research study uncovers the surprising dynamic emerging from the supplier development (SD) actions undertaken by two leading companies in technology-based luxury sectors. Ultimate and Supreme – two top brands producing supersport cars and premium motorbikes, respectively – actively engage in initiatives to enhance their strategic suppliers' capabilities and skills, i.e., SD activities.

Due to the relentless pursuit of innovation and exclusiveness typical in their competitive environment, the gaps between the suppliers’ required capabilities and expected goals are likely to be wide, thus necessitating this kind of buyer-led activities. The small pool of suppliers available, motivated by the low volumes of the business, makes this necessity even more impelling.

Literature has suggested that successful SD activities are mutually beneficial for both buyers and suppliers. Buyer-led SD efforts improve a supplier’s capabilities and performance, leading to benefits for the buying firm. Commitment by both buying and supplier firms is an important factor for embracing deeper SD efforts. SD itself is expected to enhance the supplier’s commitment, triggering virtuous dynamics that are expected to facilitate continuity in the relationship.

However, contrary to this view, the evidence from six embedded case studies involving Ultimate and Supreme and three strategic suppliers for each of the focal firms shows that the successful completion of SD activities in achieving the projects’ targets does not necessarily yield mutual relationship commitment. Instead, it can trigger a vicious cycle that can lead to a deterioration of the relationship quality and commitment, which can even result in the dissolution of the business relationship. We observed these dynamics through a longitudinal research design spanning 6 years and involving 74 face-to-face interviews with 45 informants.

In the initial stages of SD engagement, the focal firms and their key suppliers are willing to commit to the SD activities. For example, Supreme and Ultimate conducted detailed audits that revealed imperfections and criticalities in the suppliers’ production processes and subsequently instructed the suppliers on how to resolve these issues. They engaged in supplier training and knowledge transfer initiatives, including the development of protocols for quality improvement and inspection. At the same time, the suppliers also invested in the resources essential for enhancing their own capabilities so as to reach the desired performance standards.

However, as time progresses towards the later stages, as the focal and supplier firms acquire and develop unique capabilities through their collaborations, they tend to leverage the new competencies and reduce their mutual commitment, thus leading to a counterintuitive decline or termination of the relationship. Specifically, some suppliers started asking for significant price increases after they had reached the required technical and quality performance. At the same time, however, the focal firms also progressively increased their pressure on the suppliers (e.g., in terms of the cost reduction requests) as long as they were enhancing their understanding of the suppliers’ processes and their supplier development ability.

These behaviors can be appropriately captured and explained by adopting a paradox perspective.

As a matter of common knowledge, a paradox consists of a persistent tension between interrelated dualities. The two contradictory but interrelated dualities exert persistent influences, with one pole of the paradox creating the necessary conditions for the existence of the other.

Our cases reflect these dynamics by showing the existence of a tension between the interrelated dualities of value co-creation during supplier development and value capture through the leveraging of the acquired capabilities.

The buyer firm, lacking alternatives (i.e., due to the small size of the supplier pool), allocates resources, may invest in co-specialized assets, and transfers knowledge and competencies to the supplier, thus ensuring adequate sourcing of the required components or subsystems. Yet, these activities that enable value co-creation simultaneously create the necessary conditions for the existence of the other pole of the paradox whereby the supplier can then attempt to increase its value capture either by leveraging their bargaining power within the relationship or by leveraging the newly acquired capabilities, if fungible, for business opportunities outside the relationship. Reciprocally, the supplier may also invest in co-specialized assets and allocate significant resources to the SD activities to achieve improvements under the buyer's guidance.

Yet, this engagement simultaneously creates the necessary conditions for the existence of the other pole of the paradox whereby the buyer can then leverage the capabilities newly acquired through knowledge spillovers to increase its value capture outside the relationship (sourcing from another supplier or internalizing).

Our analysis also shows that, as an alternative option, the partners can choose to continue pushing on a technological trajectory, originating a virtuous cycle of renewed value creation capability while effectively managing the tension inherent in value appropriation. However, as both firms approach the limits of what is achievable in a particular technological trajectory, the potential for further improvements decreases, diminishing returns may result, and lead to a decrease in the willingness to commit.

The paper offers a novel view that sheds light on how relationship commitment, SD efforts, and supplier capability interrelate over time in the context of technology-based luxury firms.

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Authors at the Department of Management

PAOLO BARBIERI – Associate Professor

Academic disciplines: Purchasing and Supply Chain Management

Teaching areas: Management; Purchasing and Supply Chain Management

Research fields:  Innovation Management; Operations and Supply Chain Management

Paolo Barbieri is Associate Professor of Supply Chain Management at the Department of Management of the University of Bologna, Core Faculty Professor at Bologna Business School (BBS), and Foreign Visiting Professor at The Bayes Business School (former Cass Business School), City University of London. He is the Scientific Director of the BBS’s Executive Master in Supply Chain and Operations.