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During the past decade, there has been an increasing emphasis on alliances, networks, and supply chain management as vehicles through which firms can achieve competitive advantage. Indeed, the typical industrial firm spends more than one half of every sales dollar on purchased products-and this percentage has been increasing with recent moves towards downsizing and outsourcing.' Consequently, supply chain management and purchasing performance is increasingly recognized as an important determinant of a firm's competitiveness. Two widely differing supplier management models have emerged from both practice as well as academic research on the issue of how to optimally manage suppliers. The traditional view, or the arm's-length model of supplier management, advocates minimizing dependence on suppliers and maximizing bargaining power. Michael Porter describes this view of supplier management as follows:
In purchasing, then, the goal is to find mechanisms to offset or surmount these sources of suppliers' power. . . Purchases of an item can be spread among alternate suppliers in such a way as to improve the firm's bargaining power.2
The key implication of this model for purchasing strategy is for buyers to deliberately keep suppliers at "arm's-length" and to avoid any form of commitment. The arm's-length model was widely accepted as the most effective way to manage supplier relationships in the United States until the success of Japanese firms-who did not use this model-forced a re-evaluation of the model's basic tenants.
In contrast to the arm's-length model, the success of Japanese firms has often been attributed to close supplier relationships, or a partner model of supplier management.3 Various studies suggest that, compared to arm's-length relationships, Japanese-style partnerships result in superior performance because partnering firms:
share more information and are better at coordinating interdependent tasks;4
invest in dedicated or relation-specific assets which lower costs, improve quality, and speed product development;5 and rely on trust to govern the relationship, a highly efficient governance mechanism that minimizes transaction costs.6
However, while Japanese-style partnerships have economic benefits, some researchers have found that these types of relationships are costly to set up and maintain, and they may reduce a customer's ability to switch away from inefficient suppliers.7
The practical application of these two models can be found in the automotive industry, where General Motors has historically used an arm's-length model while...