Wolfgang Ulaga & Andreas Eggert

Value-Based Differentiation in
Business Relationships: Gaining and
Sustaining Key Supplier Status
Many business customers today consolidate their supply bases and implement preferred supplier programs. Con-
sequently, vendors increasingly face the alternative of either gaining a key supplier status with their customers or
being pushed into the role of a backup supplier. As product and price become less important differentiators, sup-
pliers of routinely purchased products search for new ways to differentiate themselves in a buyer–seller relation-
ship. This research investigates avenues for differentiation through value creation in business-to-business relation-
ships. The results suggest that relationship benefits display a stronger potential for differentiation in key supplier
relationships than cost considerations. The authors identify service support and personal interaction as core differ-
entiators, followed by a supplier’s know-how and its ability to improve a customer’s time to market. Product quality
and delivery performance, along with acquisition costs and operation costs, display a moderate potential to help a
firm gain and maintain key supplier status. Finally, price shows the weakest potential for differentiation.

ver the past decades, there has been a growing end of 2003, Sony Corporation announced Transformation

O recognition among scholars and practitioners that

collaborative buyer–seller relationships represent a
source of competitive advantage. The marketing literature
60, a global program intended to boost operating profit mar-
gins from 4% to 10% over a period of three years. In a
strong move of reforms, the group planned, among other
began to acknowledge the need to manage interfirm rela- measures, to reduce the number of suppliers for compo-
tionships as strategic assets in the 1980s (Jackson 1985; nents and raw material from 4700 to 1000. Over the same
Webster 1984). Since then, numerous empirical studies period, the number of registered parts was to be reduced
have investigated the benefits of close buyer–seller relation- from 840,000 in 2003 to 100,000 to achieve cost reductions
ships and their potential to achieve superior results (Cannon and quality improvements.
and Homburg 2001; Ganesan 1994; Hewitt, Money, and Such a profound shift in the management of buyer–
Sharma 2002; Jap 1999; Kalwani and Narayandas 1995; seller relationships raises several challenges for customers
Lyons, Krachenberg, and Henke 1990). and suppliers alike. From a customer perspective, firms
Along with the recognition of the strategic importance need to differentiate among qualified suppliers and identify
of supplier relationships, firms have fundamentally changed vendors that will form their consolidated supply base. This
the way they manage supplier portfolios, and customers is particularly relevant for key components, for which
have increasingly moved away from an adversarial relation- single sourcing or multiple single sourcing tend to become
ship management style with many suppliers toward a logic the norm rather than the exception. Consequently, cus-
of building long-term relationships with selected key sup- tomers rely on performance evaluation tools and vendor
pliers (Kalwani and Narayandas 1995; Narayandas and development programs to strengthen their ties with pre-
Rangan 2004; Spekman 1988). Consequently, many firms ferred suppliers.
have consolidated their supply bases. For example, at the In turn, with growing supply base consolidation, many
suppliers are challenged to move into a main supplier posi-
tion and to defend this top spot against competitors. In
Wolfgang Ulaga is Associate Professor of Marketing, Marketing Depart- short, vendors face the alternative of either gaining key sup-
ment, ESCP-EAP European School of Management (e-mail: wulaga@ plier status with their customers or being pushed into the
[Link]). Andreas Eggert is Professor of Marketing, University of role of a backup supplier, capturing only a small share of a
Paderborn (e-mail: [Link]@[Link]). This research was customer’s business. This challenge is further reinforced by
conducted while the first author was a visiting associate professor in the
the trend toward product commoditization in many markets
Mendoza College of Business at the University of Notre Dame. The
authors thank Joe Guiltinan and the Marketing Department at Notre (Rangan and Bowman 1992). As product and price become
Dame for their support in this project. In addition, the authors thank the less important differentiators, suppliers of routinely pur-
Institute for the Study of Business Markets at the Smeal College of Busi- chased products search for new ways to differentiate them-
ness Administration, Pennsylvania State University, for providing financial selves through improved customer interactions (Vanden-
support for this study. The authors also acknowledge the technical assis- bosch and Dawar 2002).
tance provided by the Institute for Supply Management in collecting the From an academic point of view, differentiation in busi-
data for this research. Finally, the authors extend their gratitude to Joe
Cannon and the anonymous JM reviewers for their constructive
ness relationships can be researched from a value-based
comments. perspective. To be effective, differentiation must contribute
to customer value by either providing benefits to the cus-

© 2006, American Marketing Association Journal of Marketing

ISSN: 0022-2429 (print), 1547-7185 (electronic) 119 Vol. 70 (January 2006), 119–136
tomer or lowering a customer’s costs. The key role of cus- process (Anderson and Narus 2004). Yet despite its impor-
tomer value has been well established in the business mar- tance, research on customer value in business markets is
keting discipline over the past decade (Anderson, Jain, and still in an early stage (Flint, Woodruff, and Gardial 2002).
Chintagunta 1993; Anderson and Narus 1998, 2004). Build- Although value assessment studies enjoy a long tradition in
ing on this literature, scholars have advanced the under- business marketing, they typically focus on the value of the
standing of relationship value in recent years, both concep- physical product, neglecting relational dimensions of
tually and empirically (Anderson 1995; Hogan and customer-perceived value (Dwyer and Tanner 1999).
Armstrong 2002; Krapfel, Salmond, and Spekman 1991; In recent years, researchers have adopted a relational
Walter et al. 2003; Wilson 1995; Wilson and Jantrania approach that investigates customer value from a relation-
1995). However, a review of the emerging literature on rela- ship marketing perspective (Payne and Holt 1999). It is
tionship value reveals several unresolved research issues. clear that the value of a business relationship is a multi-
From a conceptual perspective, a sound understanding dimensional concept that reaches beyond the price versus
of the dimensions that drive value creation in manufacturer– quality trade-off that is prevalent in consumer research
supplier relationships is needed. Previous studies explored (Gassenheimer, Houston, and Davis 1998). To date, how-
either individual drivers or subsets of value-creating dimen- ever, there is a lack of concurrence in the marketing litera-
sions in business relationships. For example, Cannon and ture on the salient value dimensions of a business relation-
Homburg (2001) investigate value creation through cost ship (Woodall 2003).
reduction in a manufacturer–supplier relationship. How- Recently, Cannon and Homburg (2001, p. 29) directed
ever, a thorough investigation of value drivers that integrate attention toward the costs incurred in business relationships,
the dimensions into a framework grounded in managerial indicating that “one method for creating value is to reduce
practice is still missing. costs in commercial exchange.” On the basis of a multidis-
From a measurement perspective, guidelines need to be ciplinary literature review, they identified three sources of
provided for modeling relationship value as an overall mea- relationship costs: (1) direct costs, (2) acquisition costs, and
sure (Parasuraman 1997). Previous research does not pro- (3) operations costs. They further suggested that a supplier’s
vide any guidance as to how the different dimensions success in lowering a customer firm’s cost in each of the
should be consolidated. Should a reflective or formative three categories leads the customer to expand its business
measurement approach be used (Diamantopoulos and Win- with the supplier. In discussing directions for further
klhofer 2001)? Indeed, researchers have conceptualized research, Cannon and Homburg recognized that “cost
value as a reflective construct without justifying their reduction is only one source of value in business relation-
approach (Lapierre 2000). More research is needed in this ships. A more comprehensive theory would consider costs
area. and benefits beyond economic costs.”
Finally, from a managerial perspective, there needs to Following this line of reasoning, we suggest thinking of
be a greater understanding of which value-creating dimen- relationship value in terms of a 2 × 3 matrix that distin-
sions of a business relationship represent a promising basis guishes between two fundamental dimensions of value
for differentiation. In other words, from a vendor perspec- creation (i.e., benefits and costs) and three levels at which
tive, which value drivers are key when competing for main these drivers operate (i.e., the core offering, the sourcing
supplier status? Which dimensions show only a limited process, and the customer firm’s internal operations).
potential for differentiation and are to be considered a Rather than relying on a hypothetico-deductive approach,
“must-have”? In turn, from a customer perspective, which we defined the value drivers from a managerial perspective
dimensions help discriminate among competing vendors (see, e.g., Bendapudi and Leone 2002; Flint, Woodruff, and
and further consolidate a supply base? Gardial 2002). We conducted depth interviews with pur-
To address these challenges, our article is structured as chasing managers using a grounded theory approach
follows: Building on Cannon and Homburg’s (2001) cate- (Glaser and Strauss 1967). We then used the results of this
gorization of relationship costs, we develop an integrated qualitative study as a basis for a cross-sectional survey to
framework of relationship value. Next, we present the investigate the various value drivers’ potential of serving as
results of our qualitative study aimed at identifying and key differentiators and to develop an overall measure of
describing key value drivers in each category of our frame- value creation in key supplier relationships.
work. We then present the results of a nationwide cross-
sectional survey among senior purchasing managers.
Finally, we discuss the implications of our research for both Qualitative Study
academics and managers and conclude by outlining study
limitations and an agenda for further research. Data Collection and Analyses
Sampling procedure. We gathered data through depth
interviews with purchasing managers in manufacturing
Toward an Integrated Framework of companies located in the Midwest of the United States. Par-
Relationship Value ticipants were contacted through the local chapter of the
Creating superior customer value is key to a company’s Institute of Supply Management (ISM) and through the
long-term survival and success (Slater 1997; Woodruff alumni network of a midwestern university. The sampling
1997). In business markets in particular, customer value is process ceased when saturation was reached, which was
regarded as the cornerstone of the marketing management indicated by information redundancy. Our final sample con-

120 / Journal of Marketing, January 2006

sisted of ten participants in nine manufacturing organiza- In developing our sample, we aimed to maximize diver-
tions. This is consistent with sample sizes recommended by sity among participants to discover various potential value
scholars for exploratory research purposes (McCracken drivers and their underlying facets. At the same time, study
1988, p. 17). participants and firms also needed to share several charac-
Sample characteristics. Table 1 displays key sample teristics to allow for comparability. For example, because
characteristics. Our sample consisted of manufacturers in a we relied on key informants, it was critical to select man-
variety of areas, such as aircraft landing systems, amplifiers agers who were influential decision makers involved in
and microphones, audiovisual video projection equipment, selecting and monitoring supplier relationships. Conse-
automobiles, household appliances, orthopedic implants, quently, we invited only senior-level managers to partici-
and vacuum pumps. Components considered by our study’s pate in the study. In addition, key manufacturing character-
participants also varied significantly. For example, cus- istics of companies needed to allow for comparability
tomers purchased aluminium wheel forgings, car seats, across firms. Thus, only companies in comparable indus-
electronic components, motors, springs, and surgical instru- tries were contacted (Standard Industrial Classification
ments. The size of participating companies ranged from codes 34–38).
small and medium-sized manufacturers to multinational Interview guide. Our interview guide was composed of
corporations, and the selected buyer–supplier relationships three sections. In the first section, we asked respondents to
had been in place between 2 and 25 years. select a specific component they purchased from at least

TABLE 1
Qualitative Study Sample

Participant Company Activity Component Purchased

Name Background and Size and Supplier Context
Denice Contract Admin. Supervisor, age 42, 22 Amplifiers Electronic components
years in purchasing Sales: $75 million One main supplier, multiple other
Employees: 450 suppliers

Frank Manager, e-procurement, age 35, 12 years Automobiles Car interior system
in industry, 4 years in purchasing Sales: $177 billion One system supplier, four alternative
Employees: 347,700 suppliers

Jack Director of Purchasing, age 45, 25 years in Aircraft landing systems Aluminium forgings
production, quality control, and Sales: $9.7 billion One main supplier (90%), one backup
purchasing Employees: 37,500 supplier (10%)

Jeff Senior Purchasing Supervisor, age 38, 13 Automotive brakes Pins

years in purchasing Sales: $6.2 billion One main supplier (95%), multiple
Employees: 21,750 other suppliers

Jerry Purchasing Manager, age 50, 19 years in Video screens Springs

planning and inventory control, 9 years in Sales: $110 million One main supplier, multiple other
purchasing Employees: 500 suppliers

John Purchasing Manager, age 38, 3 years in Electric sensors Circuit Boards
production planning, 16 years in Sales: $458 million One main supplier (80%), one backup
purchasing Employees: 5313 supplier (20%)

Mary Purchasing Manager, age 45, 25 years in Vacuum pumps Electric motors
quality control and purchasing Sales: $82 million Two main suppliers, multiple other
Employees: 400 suppliers

Richard Director, Strategic Sourcing, age 40, 18 Orthopedic implants Surgical instruments
years in purchasing Sales: $1.2 billion Two main suppliers, multiple other
Employees: 3600 suppliers

Scott Director Global Commodities, age 38, 6 Household appliances Electric motors
years in engineering, 7 years in Sales: $11 billion Two main suppliers, multiple other
purchasing Employees: 59,408 suppliers

Shawn Project Leader, Global Sourcing, age 28, 4 Aircraft landing systems Aluminium forgings
years in purchasing Sales: $9.7 billion One main supplier (90%), one backup
Employees: 37,500 supplier (10%)

Notes: Names are pseudonyms. All participants are key decision makers in the purchasing departments of their firms.

Value-Based Differentiation in Business Relationships / 121

two suppliers. We further invited participants to describe the agers largely agreed on the meaning of the value drivers.
product, how it was used in the manufacturing process, its Therefore, we made only a few changes in wording and
relative importance in the final product, and the supply mar- illustrations after this step.
ket. Customers needed to maintain a collaborative relation-
ship with suppliers for the selected product. Therefore, we Field Study Findings
used characteristics described in the extant literature (Jap Key supplier relationships. Across the board, study par-
1999) to ask participants why they considered a particular ticipants mentioned that their companies had reduced their
relationship collaborative. The purpose of this initial stage supply bases over time, as Jack illustrated:
was to ensure that respondents considered a specific use sit-
Over the last ten years, we have been streamlining our
uation and were prepared to compare alternative buyer– supply base. We used to have over 300 suppliers. We now
supplier relationships. have driven that down to 115 elite suppliers that do a great
In the second part, we asked respondents to describe job for us.
how suppliers created value for their organizations and to
provide examples from the specific supplier relationship Along with the trend toward downsizing supplier port-
under consideration. To facilitate the process, participants folios, the remaining vendors captured larger shares of pur-
were asked to describe activities between the supplier and chasing volumes. Consider the following comment from
the manufacturer, which in turn allowed the interviewer to John:
probe the different benefit and cost dimensions perceived in We have between 60 and 65 suppliers of production items,
the relationship. Particular attention was given to the com- and 10 or 11 of those make up our key suppliers, that is,
parison of each company’s main supplier and its second- 80% of the dollars we spent. For those suppliers, we have
best alternative supplier of the same component. In this sec- a specific supplier development program.
tion, we carefully phrased our questions in such a way that Participants identified situations of sourcing key com-
respondents’ testimonies were elicited in an unobtrusive and ponents from at least two firms, that is, the main supplier
nondirective manner to avoid potential pitfalls of “active lis- and its challenger. The following quotation from Richard
tening” (McCracken 1988, p. 21). Thus, the objective in this illustrates this:
stage was to facilitate the emergence of relationship value
We have about 60 suppliers of surgical instruments, and
categories grounded in the managers’ own language rather we spend $63 million on them. The number one supplier
than to capture merely the dimensions previously specified has $10 million of it, and the number two supplier has $7
by the investigators. Finally, in the third part of the inter- million. These are the two suppliers that stick out. It then
view guide, we invited participants to describe themselves drops dramatically. The other suppliers will get down to a
and their company background. couple of $100,000 each.

Analysis and interpretation. On average, interviews After participants described their supply base and
lasted one and a half to two hours. Each interview was selected a specific supplier relationship, we moved on to
audiotaped and transcribed verbatim. We used grounded explore how vendors gained and sustained key supplier sta-
theory coding (i.e., open, axial, and selective coding) to tus with a customer. As we show in Table 2, nine value dri-
identify relationship value drivers and to describe their vers emerged from our depth interviews. We classified these
facets (see, e.g., Flint, Woodruff, and Gardial 2002). We drivers by value dimension (i.e., relationship benefits and
assessed the trustworthiness of our findings by applying the costs) and value sources (i.e., value creation through the
techniques of triangulation, informant feedback, and repli- core offering, within the sourcing process, and at the level
cation (Miles and Huberman 1994; Strauss and Corbin of the customer’s operations). In the next section, we pre-
1998). To improve content validity further, we presented the sent these core value-creating dimensions.
study’s methodology and findings during a workshop with
27 purchasing professionals at ISM. We asked participants Value Creation Through the Core Offering
to assess the descriptions of the core value drivers and to We asked managers what was needed for a vendor to gain a
comment on how well they reflected their practice. Man- key supplier status. Participants consistently described a set

TABLE 2
Value Drivers in Key Supplier Relationships

Relationship Value Dimensions

Sources of Value Creation Benefits Costs

Core offering Product quality Direct costs

Delivery performance

Sourcing process Service support Acquisition costs

Personal interaction

Customer operations Supplier know-how Operation costs

Time to market

122 / Journal of Marketing, January 2006

of core dimensions. They identified product quality and nated that, but we have made substantial improvements in
delivery performance as the two benefit dimensions at this the last four years. One of the reasons is that we have been
level of value creation. The corresponding relationship cost sourcing with higher-quality suppliers.... When we are
sourcing with [first-tier supplier], we can go through all of
dimension was direct product costs. Respondents explained their manufacturing locations and see nothing but great
that vendors needed to meet these must-haves. Therefore, marks for them. That is one way a supplier can charge a
we named this first level of value creation “the vendor’s little more. It’s because they have a proven track record to
core offering.” Jerry illustrated this point: supply excellent parts.
I think you have to look at their quality, delivery perfor- However, it also became apparent that it is increasingly
mance, and price, and then you need to evaluate all of difficult for suppliers to compete on quality only. As Frank
that. If anyone of those is weak and you cannot get them
said,
to improve, then you have to change. All of those factors
have to be in harmony.... I would say that is the ground Most of our suppliers are all delivering a quality product.
zero. That is where they need to be in order to be Our quality group will work with suppliers to make sure
considered. that they are meeting our quality objectives. So then we
have a bid list which the buyer can take.
Product quality. Study participants invariably empha-
sized performance and reliability in a supplier’s product On the basis of these findings, we identify product qual-
offering. In addition, respondents mentioned the importance ity as the extent to which the supplier’s product meets cus-
of meeting the customer’s technical specifications, as the tomer specifications. Key quality aspects are performance,
following comment from John illustrates: reliability, and consistency over time. Our study confirmed
the potential for differentiation through superior quality. Yet
For a circuit board, we look for a specific output. We want
to make sure there are no cracks in the hybrids. None of its role appeared to be limited.
the parts must be skewed on the circuit board. The part Delivery performance. Purchasing managers identified
has to be dimensionally and electrically correct per a set three value-creating aspects in this area. First, suppliers cre-
of specifications. We gave the supplier a drawing that out-
lines the physical dimensions, the distances between the
ate value by consistently meeting delivery schedules (on-
pads, where the capacitors are supposed to be, [and] time delivery). Frank talked about consequences of late
where the traces are, and then there are the electrical spec- deliveries in the car industry:
ifications the supplier has to meet—that is, the output this The most important is that they are on time with the due
circuit board has to produce. date that we have on the purchase order. We try to stream-
Respondents also mentioned the importance of deliver- line how much inventory we have as much as possible. If
the suppliers are not meeting their schedules in a timely
ing consistent quality levels over time. Notably, a vendor’s
fashion, that causes a big hiccup and may result in pre-
key supplier status may shelter the firm from short-term mium freight to get parts here.
sanctions. For example, respondents mentioned that their
firms worked with key suppliers to solve a vendor’s quality According to the respondents, a second way to create
problems through joint teams. Consider the following state- value is to adjust to changes in delivery schedules due to
ment from Jeff: spikes in demand or changes in the product mix (delivery
flexibility). Managers valued suppliers’ responsiveness for
We work with a supplier that doesn’t hit the [quality] tar-
get.... We go in and find out what problems they have. Our
emergency deliveries, as this quote from Jack illustrates:
Supplier Quality Group actually helps them to develop You will notice the suppliers that are your best friends.
test procedures, to find the latest technology, [and] to help When you are down because someone didn’t count the
them fix issues on the line. Quality is a major component, parts right, you call them up.... A lot of suppliers will turn
but we do help them out in identifying where they can their shop around to keep us running. Those are the things
improve. that really stick in your mind. Suppliers that go above and
beyond what a typical supplier will do.
Several participants in our study underscored the pres-
sure for continuous improvements. For example, Scott illus- As a third source of value creation in this area, partici-
trated the need for cutting-edge product quality: pants mentioned suppliers’ capacity to deliver the right parts
One of the key elements of a supplier relationship is hav-
consistently (accuracy of delivery). Minimizing missing or
ing the best-in-class quality for the components that they wrong parts in shipments saves time and effort for the
supply.... We expect suppliers to work with us and try to customer.
continuously drive quality. As you see more European and In summary, we identified delivery as a second value
Asian products come into our country, the bar gets raised driver. Suppliers add value by consistently meeting delivery
all the time, and you have to benchmark yourself against schedules (on-time delivery), by adjusting to delivery
different competitors than those you had in the past. changes (flexibility), and through their capacity to deliver
In speaking about quality’s contribution to value crea- the right parts consistently (accuracy).
tion in a supplier relationship, participants indicated that Direct product costs. There was remarkable commonal-
superior product quality levels may indeed serve to some ity across respondents when they discussed the role of
extent as a differentiator among suppliers. Consider the fol- direct product costs. Participants identified the actual price
lowing comment from Frank: charged by a supplier as the core relationship cost driver.
They [market research firm] do a customer satisfaction Managers focused on “average,” “fair,” or “reasonable”
survey every year on vehicles. The Japanese have domi- market price. As Jerry explained,

Value-Based Differentiation in Business Relationships / 123

 We don’t want any supplier that loses money, but we want lems that may or may not be related to the technical
them to be tough too. We want them to give us the best design?
price as they can at the margin they can live with. They
need to make money as well as we do. When probing further into the importance of services in
value creation, three facets emerged from our depth inter-
On further probing into the topic, participants explained views in this area. First, respondents highly valued a sup-
that they were hesitant to overemphasize price considera- plier’s responsiveness, that is, the vendor’s willingness to
tions. For example, Scott said, address customers’ concerns in ongoing relationships.
There is always somebody cheaper, but it is one thing to Shawn mentioned responsiveness as a key service element:
say you can make a part at a lower cost, and it is another
I’d say one of the key drivers of differentiation has to do
to say you can do both: Support our business needs and
with responsiveness. For example, our products are very
supply us at a lower cost. We are very hesitant to be over-
complex. We are talking about hundreds of pages of docu-
aggressive. There are customers who wave these prices in
mentation, and you are not going to get it right the first
front of suppliers that come from people who can’t make
time. We don’t expect you to, but what we do expect is a
or produce. That is a dangerous game to get into with your
very concerted effort to get there. One of the main things
supply base.
that hurt us is the fact that a supplier is unresponsive to the
In addition, participants’ firms face a strong pressure to problems we are having. So, at the end of the day, respon-
siveness is a huge part of the equation.
reduce costs in their respective markets. Suppliers are
expected to commit to annual price reductions within long- A second facet of service support was the supplier’s
term agreements and to pass cost savings on to customers. capacity to manage exchanges of information (information
In turn, respondents agree to higher order volumes to com- management). This subdimension had two ramifications:
pensate for lower prices. As John commented, First, respondents mentioned that customers frequently
We tell our suppliers that we want 4% of cost reductions changed their requirements. Whenever such changes
every year. That is pretty typical in the automotive indus- occurred, suppliers were expected to follow through in a
try. So, speaking of suppliers, I want a guy who is willing timely manner. Thus, speed of information represented an
to continuously improve his operations. One who finds important aspect of information management. Second, our
ways to lower his costs, so that some of that can be passed participants voiced their need to receive detailed informa-
on to me. So, I can say to my management, “Hey, instead
tion. The following quotation from our interview with Jeff
of paying $1.50 for this item, now I will start paying
$1.40.” There is value that can be added that way. It echoes both speed and appropriateness of information:
allows us to offer our own customers a cost reduction. Details are important. If we get a request for a quote from
[car manufacturer] and our supplier just gives us a number
Similar to our findings in the area of product quality, a on a paper, it doesn’t help us out.... We get requests for
key supplier status may protect a vendor from competition, changes from our customers all the time, and sometimes
at least in the short run. Customers indicated that they pro- we need to get back to them within a few days. So speed
vided main suppliers with an opportunity to match competi- is certainly a factor.
tion. In addition, they assisted key suppliers in driving down
The third component of service support is the outsourc-
prices through joint cost reduction programs, an initiative
ing of activities to suppliers. Respondents cited examples of
not granted to backup suppliers.
situations in which suppliers added value by taking respon-
In summary, we learned from our interviews that man-
sibility for particular customer activities. In our interviews,
agers focused primarily on price as the key relationship cost
we learned that key suppliers solidified their competitive
driver. Participants valued both the supplier’s capacity to
position by performing tasks on behalf of their customers.
offer a fair market price and its commitment to reduce
Shawn talked about how a supplier performed routine test-
prices continuously. In turn, key suppliers benefited from
ing for his firm:
increased order volumes and an opportunity to match
competition. There are several things that are service related. One of
them is testing and qualification. Take, for example, aero-
Value Creation in the Sourcing Process space grade bolts—the types of things that hold wheels
together on aircrafts. This supplier will come out and do
Beyond the core offering, vendors create value in the sourc- testing for you. Because of the amount of tests we have,
ing process. Relationship benefit drivers identified at this there is not enough capacity for testing [at our plant]. So
level are the supplier’s service support and the personal they would do the testing for us, report the results, and
interaction between both parties. The mirroring value- work with us to make improvements on the parts, and that
creating cost dimension is acquisition costs. is a value-added service.

Service support. The supplier’s capacity to provide Customers benefited from outsourcing in numerous
value-added services was another common theme. The fol- ways. For example, by delivering integrated systems as
lowing comment from John illustrates in general terms the opposed to single parts, suppliers contributed to consolidat-
role of services in a buyer–seller relationship: ing the supply base. Consider the following comments from
Frank about outsourcing:
The other thing would be just general service. If we have
a quality problem, are they available to answer that ques- Consolidation in the supply base is one way in which the
tion? I talked about it specifically on the technical side, suppliers are creating value. For the [car model], we
but it is actually bigger than that.... I will call it a general looked at suppliers that could provide an entire interior, so
service category; are they there for us when we have prob- this meant that they would be supplying the instrument

124 / Journal of Marketing, January 2006

 panel, the floor consol, the overhead system, the door pan- One of the things that are of value is that you have the
els, the side wall trim, garnish, the rear shelf and even the presidents of these companies show their face here. We
carpeting.... Suppliers take on some of the subassembly like the comfort of having the president here and knowing
operations. Their facilities are close to our assembly what is going on.... I can call the president of a company
plants, which leads to large reductions in plant space. So and get him to shake the stick over there. It’s the name,
we can either build more vehicles or reduce the time that the face: “You can count on me if you need to use the sil-
it takes to build a vehicle. ver bullet to get something done.” I think that is very
important.
In summary, we identified service support as an impor-
tant relationship value dimension. In addition to the sup- Although participants viewed personal interaction as an
plier’s level of responsiveness, respondents mentioned that important asset, they also cautioned against its potential pit-
key suppliers create value through information management falls. For example, Richard referred to his company’s inter-
and outsourcing of activities. nal rules of conduct with respect to handling gratuities:
Personal interaction. Managers noted numerous exam- As a buyer, you really have to be careful of how you are
ples of value creation through personal interaction. They perceived within the organization. If you are walking out
held the development of relationships at an individual level of the front door every day to the supplier’s car to get
in high regard. Consider the following statement from lunch, that is an issue. We don’t mind the occasional, but
Denice: for the most part, we have a very low tolerance level for it.
The individuals that work for us are well-paid individuals.
I think the personal issues are important, at least for our We don’t need to take advantage of the other stuff.
company, because there is such a close interaction
between their folks and ours. If you have people that for In summary, personal interaction emerged as an impor-
one reason or another do not get along, it strains the rela- tant value driver. Knowing the supplier’s key contact per-
tionship and is counterproductive. So I believe that the sonnel, getting along well with the vendor’s representatives,
value of the interpersonal skills is quite high. and involving a supplier’s top management all contribute to
Developing interpersonal ties improved problem solv- high levels of personal interaction.
ing and communication and led to a better understanding of Acquisition costs. Participants highly valued a supplier’s
each partner’s goals. These benefits were regarded as con- willingness to take costs out of the sourcing process. Inven-
tributing to the growth of a relationship as a whole. As Jeff tory management emerged as a first opportunity for cost
commented, reductions in this area. For example, Scott mentioned how
When I first came to [company], the person who I took the having suppliers manage customers’ inventories improved
position over [from] was not well liked by the supplier. cash flows:
They voiced their opinion as such. I changed the way we
work with them. When dealing with these people, I look at Inventory management is of tremendous value to us
them as more than just a tool. I look at them as a person. because we are able to take costs off our books and rein-
To me, it is very important. If you don’t have that, I don’t vest in other parts of our business to become more effi-
think you can function well in the industry. I think it [the cient. Suppliers that really work well with us move to a
relationship] grew more after I came on board because of “pay-and-consumption” model. We work with them to
the relationship that I developed with them. I think they reduce inventories by trying to get visibility throughout
opened up and understood what they need[ed] to do to the whole supply chain.
move the relationship ahead.
Order handling represented a second way to reduce
Managers considered suppliers’ key contact personnel acquisition costs. Participants’ firms had standardized order
important facilitators for conducting business. For example, processes and had downsized staff. For example, Jack men-
when comparing two suppliers of electrical motors, Mary tioned that he used to have 14 buyers in his purchasing
mentioned that one company was definitely much easier to department. Over a period of 20 years, he was down to 6
work with than the other: buyers. Thus, participants relied more heavily on suppliers
One company is much easier to do business with than the for order handling. As John commented,
other, just because they give us their names and e-mail We’ve set up a Kanban system. So I never, ever issue a
addresses. The quality people know the quality managers; purchase order for the delivery of those circuit boards.
they can call them up and talk to them. All of those lines The operator on the line knows that when he gets down to
are very open. The other company, well, you have to do all one box, he sends a notification to the supplier, “Hey,
of those things through the salesperson. It is much more Mister Supplier, I am down to one box, send me two more
difficult to get the answers because now, my quality per- boxes.” So he does that, and I never see the order for that.
son is calling me asking a detailed question, and I have to
call the salesperson and give him a detailed question, and Inspection costs represented a third vector of value crea-
he goes and talks to his people, who ask a question that tion through reductions of acquisition costs. Customers
neither one of us knows an answer to. reduced incoming inspections as suppliers consistently met
Finally, respondents indicated that personal interactions expectations. John talked about how these measures trans-
should be developed at all levels of the organizations. In lated into cost savings:
particular, strong involvement of the vendor’s top manage- We track quality each month through our no-incoming-
ment was viewed as an indicator of a good working rela- verification program. If a supplier’s product meets our
tionship. As Richard illustrated, quality criteria so many months, we don’t inspect the

Value-Based Differentiation in Business Relationships / 125

 product anymore here. As soon as it comes in the door, it example, we don’t manufacture our own surgical instru-
goes to the assembly line. ments. So we don’t have the knowledge base of instru-
ment makers walking around our shop floor. If we design
In summary, suppliers find multiple ways of adding a new product, we rely on the expertise of the instrument
value by taking costs out of the sourcing process. Drivers of makers. They need to come back to us with their experi-
cost reductions identified in this area were inventory costs, ence and say, “Your design can’t be manufactured. It
order-handling costs, and incoming-product inspection won’t work, or it will cost you a lot of money.” We involve
costs. them early on in the process. They need to tell us where
we need to put costs into the instrument and where it is
Value Creation in Customer Operations not necessary. That goes back to the collaboration in our
preproduction planning meeting. The supplier is there, our
Customer operations represent another domain of value development engineer is there, and they can talk back and
creation. The benefit dimensions identified in this area are forth.
the supplier’s specific know-how and its capacity to
In summary, a supplier’s know-how provides many
improve time to market. The corresponding cost dimension
opportunities to add value in a manufacturer–supplier rela-
is operations costs.
tionship. Key sources of value creation are the vendor’s
Supplier know-how. A vendor’s know-how emerged as deep knowledge of the supply market, prior experience with
another common theme in our interviews. Participants pro- customer operations and products, and an early involvement
vided many examples of situations in which access to a sup- in new product development. We also learned that key sup-
plier’s technical expertise was viewed as highly valuable. pliers benefit from their preferred status because the inter-
Customer organizations benefited from their suppliers’ actions between key supplier status and know-how are
know-how in several ways. First, participants mentioned mutually reinforcing. Indeed, holding a specific expertise
that vendors’ extant knowledge of supply markets provided helps a supplier solidify its position. In turn, a stronger
them with an opportunity to present customers with new position enables a vendor to accumulate more experience
sourcing alternatives. The following comment from Denice with a client’s products and gain better insights into a cus-
echoes this idea: tomer’s operations than any other supplier.
[This supplier] comes to our facility at least once a week Time to market. In our interviews, time to market
and works very extensively with our design engineers. So emerged as an important value driver in supplier relation-
if they have an application for a semiconductor, they give
him the performance specifications and let him come back
ships. For example, in talking about the orthopedics indus-
with one or two solutions. This reduces the investment we try, Richard highly valued a supplier’s contribution to
have to make in terms of knowledge and experience of reduced cycle times:
individual components. The semiconductor market is
In our industry, you’ve got to be quick. If you get your
changing every single day, and to keep abreast of all new
product out to the market first, you win. The number of
products in the market would be very expensive for us. So
small orthopedic implants manufacturers is growing, and
we rely very heavily on this supplier to bring us those
the really small ones are taking little pieces of market
products and give us awareness. It also means that we can
share away from us. If you want to make the big dollars in
have younger people on the engineering staff. They don’t
the orthopedic world, you have to get your product out
have the same background.
there first, and right now, one of our main goals is to look
Second, a supplier’s thorough understanding of a cus- at how you reduce the time it takes from the idea genera-
tomer’s operations and a long-standing experience with a tion of a product to the time you get it up to market. In the
past, it took us three years. The goal is to take 25% out of
client’s products both created opportunities for vendors to that.
add value in the improvement of existing products. As
Shawn explained, Participants explained that their firms faced an increas-
ing pressure to develop products faster. For example, Frank
Suppliers that have a lot of experience with your products
know how to make parts efficiently and effectively. A sup- mentioned that his firm had reduced cycle times from
plier that has done a specific part for years can turn approximately 40 months to fewer than 18 months over a
around and make a change at a third of the cost of a new period of several years. Respondents turned to suppliers in
supplier. Their lead time is usually less also because they different areas to reduce cycle times. Speed of executing
can do the setup in the dark, and they make suggestions.... design work emerged as a first area, as Frank illustrated:
The expertise in a relationship is amazing in terms of the
value it creates. Their experience and knowledge really Our global suppliers can get much faster turnaround in
protect them from global competition. completing or changing designs. They take in a require-
ment and send it to an offshore facility where they have
Finally, suppliers assist customers in the development of much more of the day to work with it. If we decide at 3:00
new products. Key suppliers are frequently involved early P.M. to do something, they can send it to a new facility,
on in suggesting innovative solutions and taking costs out of and by the time you come back the next morning, you
a new product up front. In speaking about early involve- already get a result.
ment of key suppliers in the new product development Participants also referred to the pressure of developing
process, Richard commented, prototypes faster. By developing a prototype exactly to the
The knowledge base that suppliers build up is one of the customer’s specifications the first time, suppliers improved
key characteristics that we look for in a supplier. For cycle time considerably. Richard illustrated this idea:

126 / Journal of Marketing, January 2006

 You have to have instrument suppliers that are quick at Finally, respondents mentioned tooling costs and war-
what they do. For example, last week, we delivered two ranty costs as another area of value creation through cost
models to an instrument supplier, and they turned around reductions in this field. As Frank mentioned,
prototypes within four days. That is an extreme, but typi-
cally, what we are looking for are lead times of 4 to 6 We’ll ask suppliers what they charge us for warrantee and
weeks. Two years ago, it would have been 12 to 16 weeks. tooling. If you have a supplier that has shown very good
quality and also has fairly low warrantee and tooling costs
Finally, managers explained that suppliers performed with their components, that is considered an advantage
testing and validation tasks faster than customers. In addi- over another supplier that typically does not do well on
tion, by avoiding unnecessary product retesting, they were these [costs]. That is an operations type of costs.
able to accelerate cycle times significantly. Consider In summary, suppliers find multiple ways of adding
Frank’s statement: value by taking costs out of customers’ operations. Major
Suppliers add value through testing and validation. We opportunities for cost reductions in this area are product
have all kinds of validation requirements for our parts, costs, manufacturing process costs, and tooling and war-
whether it is bumper impact tests or sled tests for the inte- ranty costs.
rior airbags. Suppliers take over more and more of our
validation, and they are able to do it a lot faster. That helps Relationship Value Index Construction
us to improve our cycle times. Some of our validation
equipment is used 24 hours, 7 days a week. By going to Our study provides valuable insights into how the different
supplier facilities, we speed up the validation process and dimensions should be collapsed into an overall measure of
get cost savings faster. relationship value. Whether value should be modeled as a
reflective or formative measure is of particular importance.
In summary, a supplier’s ability to reduce time to mar- Diamantopoulos and Winklhofer (2001) argue that reflec-
ket represented an important source of value creation in tive specifications of latent variables often mistakenly pre-
buyer–supplier relationships. Suppliers add value through vail in the marketing literature. In reflective specifications,
accelerating design work, developing prototypes faster, and higher-order constructs are assumed to cause their dimen-
speeding up the testing and validation process. sions rather than be caused by them. Consequently, dimen-
Operations costs. Participants discussed several direc- sions are viewed as strongly correlated and interchangeable
tions of value creation through cost reductions at the level facets of the focal construct (Bollen and Lennox 1991). In
of customer operations. One way to reduce operations costs contrast, formative specifications view a higher-order con-
was to take costs out of existing products. Frank provided struct as being caused by its dimensions. From a formative
the following example: perspective, the higher-order construct is defined by its
dimensions, which do not need to be highly correlated with
We started a couple of years ago a formal supplier sugges- one another. According to Diamantopoulos and Winklhofer,
tion program. We are setting objectives to save a certain
the choice between a formative and a reflective specifi-
amount of money per year through submitting suggestions
for how we can save money on a part. For example, a sup- cation should be based primarily on theoretical
plier will say, “We have to pierce five holes in this considerations.
stamped part. We noticed the one hole isn’t used anymore. In the past, researchers conceptualized relationship
Now, there is one less piercing operating we have to do. value as a reflective construct without justifying their
You can save that.” Once engineering has approved it, we approach (Lapierre 2000). However, the findings of our
implement the idea. Then, they get a percent of the cost grounded theory study suggest a formative measurement
savings, and we get a percent.... It goes a long way into approach. Indeed, the decision rules that Jarvis, Mackenzie,
making your company stand out as to being proactive in
helping us save costs. Our “Suppliers of the Year” are
and Podsakoff (2003) developed for determining whether a
meeting those objectives. So it just makes sense that you construct is formative or reflective suggest the use of a
would want to give those suppliers more business. composite latent construct model in our context. For exam-
ple, in our study, causality flows from the measures to the
In addition to taking costs out of products, participants construct. In addition, the value drivers do not need to be
explained that valued suppliers typically contributed ideas highly correlated with one another either within each of the
of how to improve costs in the manufacturing process. For value sources specified in our framework or between them
example, Scott discussed differences between two suppliers (see Table 2). For example, regarding a supplier’s core
regarding costs associated with the transformation process offering, a specific supplier may score high on product
from steel coil to stamped parts: quality but low on delivery performance. Similarly, a sup-
We are buying steel from a certain supplier, and another plier may excel in the sourcing process, yet the same firm
supplier came in and offered us a lower price for that same may not differentiate itself in the area of customer opera-
type of steel. You have the cost to get it to the factory, tions. Indeed, study participants repeatedly described situa-
which is the price of the steel and the freight cost, but you tions in which value drivers did not correlate with one
also have the impact on the yield of the steel as it is con- another. For example, Shawn talked about the relationship
verted in your factory, and that is all the way from the coil
between suppliers’ quality and price levels:
to a painted or stamped part. So we will evaluate that, and
we will try to get an understanding of whether there is any We can get really great pricing from places in Mexico and
difference in the cost to do that conversion. Really, we are China, but when the product comes in and it has poor
talking total cost of ownership here. quality and they deliver late, that isn’t going to keep my

Value-Based Differentiation in Business Relationships / 127

 line running. Management really gets upset when you run this end, we conducted a nationwide survey among pur-
out [of] a $.50 piece that you are trying to control inven- chasing managers. This section describes both the method-
tory on and we can’t ship a $200,000 order. ology and the major findings of this second step.
Similarly, Denice provided examples of situations in
Measure Development
which suppliers performed high on the quality and delivery
dimensions but scored low on personal interaction: We took several steps to ensure the content validity of our
measures (Churchill 1979; DeVellis 2003). First, on the
A couple of years ago, we focused on the reduction of our
supply base. We had a number of suppliers that were basi- basis of our qualitative study, we developed definitions of
cally on time and had no quality issues, but because of the each relationship value driver, and we generated a pool of
fact that there were interpersonal problems, we made the 175 items that tap the various facets of each driver. We dis-
decision to cut them off altogether as a supplier. That was cussed both definitions and items in a workshop with pur-
primarily because of their interpersonal skills. Their cus- chasing managers. We asked the managers to assist us in the
tomer service person was not helpful or responsive [and]
validation of each definition, and we invited them to iden-
was very slow or abrasive. That is a very important part of
the relationship. tify the items that best captured the respective dimensions.
As a result of this first step, we eliminated 77 items, leaving
Finally, Jack discussed a situation in which his firm a reduced item pool of 98 items for nine value drivers.
maintained the relationship with a supplier mainly because In a second step, we submitted the remaining items for
of the vendor’s high-quality products. In turn, delivery, pric- an item-sorting task to 15 marketing academics identified as
ing, and personal interaction were considered sources of experts in the areas of industrial marketing, relationship
conflict: marketing, and research methodology. We asked these par-
This supplier has a good quality product, but when you ticipants to assign the individual items to what they believed
look at the purchasing side, delivery, and their pricing,... to be the “correct” value drivers. As Anderson and Gerbing
[shakes his head]. When the salesman comes in here, I (1991, p. 734) propose, we computed two indexes for each
don’t want to spend time with him, because he just gives item to identify items that were difficult to assign to the cor-
me a ”song and dance,” and I usually end up getting into
an argument with him. So when he comes in, he doesn’t responding facets.
see me; he just goes up to engineering and gets his part on
the blueprint, so that we have to buy it.... I try to build a
Survey Instrument
better relationship. It hasn’t been good for me, because I Questionnaire development. The survey is composed of
have been burnt too many times with those guys, and they three parts. First, mirroring the approach we adopted in the
don’t seem to be changing their ways. qualitative study, we asked respondents to select a specific
Therefore, depth interviews revealed that value drivers key component and to describe the final product for which
may correlate, but they do not need to correlate. Indeed, it was sourced. We asked respondents to name their main
respondents explained that they frequently made trade-offs supplier for the specific product and their second supplier in
between value dimensions. Consequently, our qualitative terms of purchasing volumes. The purpose of this initial
study’s findings suggest that from a methodological stand- stage was to ask respondents to consider a specific supplier
point, a formative measurement approach should be used and to prepare for a comparison of alternative buyer–
rather than reflective measures when relationship value is supplier relationships. We asked participants to compare the
modeled as a multidimensional construct. More precisely, main supplier with the second supplier for several reasons.
using Jarvis, Mackenzie, and Podsakoff’s (2003) classifica- First, depth interviews showed that managers typically
tion of second-order factor models, a Type IV model (i.e., a compare these two alternatives when making value judg-
formative first-order, formative second-order model) should ments. Second, respondents needed to use similar compari-
be specified when value creation is modeled in buyer– son standards to allow for meaningful comparisons. Finally,
supplier relationships. from a managerial perspective, we were interested in under-
In summary, our qualitative study addressed the concep- standing how vendors achieve a main supplier position and
tual issues raised in this research. We identified and defend it against their toughest competitor, that is, their
described value dimensions in buyer–seller relationships. In challenger in terms of purchasing volume.
addition, we resolved the issue of how to integrate the The second part contained a list of items that tap the
dimensions into an overall index. Building on our findings, relationship value dimensions. We first asked respondents
we define customer-perceived value in a key supplier rela- to answer several statements with respect to the relationship
tionship as a formative higher-order construct that repre- between their firm and the main supplier. Subsequently, we
sents the trade-off between the benefits and the costs per- asked respondents to compare their main supplier with the
ceived in the supplier’s core offering, in the sourcing second supplier. All items used seven-point rating scales
process, and at the level of a customer’s operations, taking (1 = “strongly disagree” and 7 = “strongly agree”).
into consideration the available alternative supplier In the third part of the questionnaire, we invited partici-
relationships. pants to respond to a set of questions that described them-
selves, their company, and the supplier relationship.
Quantitative Study Because we relied on the perceptions of key informants, we
We designed our quantitative study to address the method- needed to ensure that respondents were competent to report
ological and managerial issues raised in this research. To on the supplier relationship. Therefore, respondents needed

128 / Journal of Marketing, January 2006

to fulfill minimum requirements with respect to their posi- Nonresponse bias. We assessed nonresponse bias fol-
tion, their tenure with the company, and the length of the lowing Mentzer, Flint, and Hult’s (2001) recommended
relationship. In addition, we asked respondents for a self- guidelines. We contacted a random sample of 30 nonre-
assessment of their ability to portray the supplier relation- spondents over the telephone and asked them to answer our
ship accurately. Specifically, we asked them to indicate how four questions that captured overall value perceptions in a
confident they were in answering the questionnaire, how supplier relationship (RELVAL 1–RELVAL 4 in the Appen-
involved with and knowledgeable they were about the sup- dix). In addition, we asked nonrespondents to provide back-
plier, and to what extent they could influence purchasing ground information on themselves and their company. The
decisions. t-tests of group means revealed no significant difference
Questionnaire pretest. We submitted the mailing cover between nonrespondents and our sample. Thus, nonre-
letter, our directions for completing the questionnaire, and sponse bias was not considered a problem in the present
scale items to a pretest with four senior purchasing man- study.
agers. Few items were slightly modified. The final list of
value measures appears in the Appendix. Measurement Model
We report the results of our partial least squares (PLS)
Data Collection
analysis in Figure 1 (for a detailed discussion of the PLS
Sampling procedure. We collected data in a nationwide algorithm, see Lohmöller 1989). We chose PLS because of
survey among purchasing managers of U.S. manufacturing the formative nature of the higher-order value construct.
firms. We used a three-wave mailing approach (Dillman This estimation procedure accommodates both reflective
1978). We randomly selected 1950 members of ISM from and formative measures (Fornell and Bookstein 1982). We
the association’s database. For an exploration sample, we measured relationship value on the basis of (1) the forma-
contacted 527 managers, and for a validation sample, we tive value dimensions identified in the exploratory study
contacted 1423 managers. We selected only senior-level and (2) four reflective items that captured relationship value
managers, indicated by job titles such as Vice President Pro- as a unidimensional concept on a high level of abstraction.
curement, Director of Global Sourcing, Director of Supply The formative and the reflective measurement
Chain Management, or Purchasing Manager. In addition, approaches share 73% of their variance, indicating predic-
we selected only manufacturing companies (Standard tive validity of the formative value dimensions. All param-
Industrial Classification codes 28–30 and 32–38). eter estimates are significant at the 5% level. We cannot
A total of 118 (response rate of 22.4%) questionnaires report an overall goodness-of-fit, because the objective of
were returned for the exploration sample, and 303 (response PLS is prediction versus fit (Fornell and Cha 1994). Partial
rate of 21.3%) were returned for the validation sample. We least squares matches our research objective, that is, to
dropped 18 respondents who reported an average level of assess the potential for differentiation of the formative value
confidence in their responses of four or lower on a seven- dimensions. Together with content validity established in the
point scale. We discarded 3 additional responses because of qualitative study by expert agreement, these results provide
excessive missing data, which left a final sample of 112 for empirical evidence for construct validity (Rossiter 2002).
the exploration sample and 288 for the validation sample. We measured relationship costs on three formative
Sample characteristics. Respondents purchased a broad dimensions: direct product costs, acquisition costs, and
variety of components for multiple applications. Firms operations costs. In line with Cannon and Homburg (2001),
ranged from small enterprises to multibillion dollar compa- we summated the respective cost items to obtain a score for
nies. On average, customers had been buying from their each of these cost drivers.
main supplier for 13 years, with a standard deviation of 9 To operationalize relationship benefits, we developed a
years. In our sample, on average, main suppliers captured measurement model first. On the basis of our conceptual
73.3% of customers’ order volumes in a given product cate- framework, we expected three dimensions to mirror Cannon
gory. In contrast, second suppliers secured 19.5% of cus- and Homburg’s (2001) conceptualization of relationship
tomers’ needs. Finally, all other suppliers accounted for costs. To probe this conceptualization, we subjected the
only 7.2% of orders. exploration sample to exploratory factor analysis. Three
Respondent characteristics. Respondents held senior factors emerged on the basis of the Kaiser criterion (see
positions in their firms. They averaged 17 years of experi- Table 3). Product quality and delivery items formed the core
ence in their area and 10.4 years with their companies.1 benefits (24.4% variance explained). Personal and service
Responses regarding confidence about answering the sur- benefit items loaded on a common factor that represented
vey and knowledge of the supplier relationship displayed the benefits related to the sourcing process (28.4% variance
mean ratings of 6.0 (confidence in answering the survey), explained). Know-how and time-to-market items loaded on
6.01 (involvement in the supplier relationship), 6.15 a common factor that formed the operations benefits of a
(knowledge about the supplier), and 5.89 (influence of pur- purchasing relationship (23.2% variance explained).
chase decisions) on a seven-point scale. On the basis of the validation sample, we assessed con-
vergent and discriminant validity (Table 4). Factor loadings,
1None of the background factors included in this research (i.e., t-values, average variance extracted (AVE), and Cronbach’s
company size, relationship length, and respondents’ personal alpha are indicative of a high level of convergent validity. In
background and tenure with the company) moderated the results. addition, we assessed discriminant validity with Fornell and

Value-Based Differentiation in Business Relationships / 129

 FIGURE 1
Formative Higher-Order Measurement Model

R2 = .73
Relationship
value

.77 –.17

Relationship Relationship
benefits costs

.11 .68 .27 .22 .44 .61

Core Sourcing Operations Acquisition Operation

Direct costs
benefits benefits benefits costs costs

Notes: All parameter estimates are significant at the 5% level.

Larcker’s (1981) criterion. Table 4 shows that the smallest While the advantages of working with fewer suppliers
AVE exceeds the squared correlation between each pair of are well documented in the purchasing and supply chain
the relationship value dimensions. This indicates a satisfac- management literature, scholars also recognize its down-
tory level of discriminant validity. After we successfully sides (Kekre, Murthi, and Srinivasan 1995; Monczka, Trent,
established convergent and discriminant validity, we con- and Handfield 2005; Newman 1989; Trevelen and
structed summated scales for the benefit dimensions. Schweikhart 1988). Above all, buyers face increased depen-
Together with the relationship cost scores, they served as dence and, consequently, higher risks of supply disruption
formative indicators for the first-order relationship benefit and supplier opportunism (Trevelen and Schweikhart 1988).
and cost dimensions, respectively. Although suppliers gain greater volumes, improved consis-
tency, and lower transaction costs, the cost of doing busi-
ness with the customer may also increase (Newman 1989).
Discussion and Implications Key suppliers are often required to provide internal cost
Against the background of supply base consolidation, our data. Furthermore, they are permanently pressured to invest
research contributes to a better understanding of how ven- in the relationship. Finally, the main supplier position
dors of routinely purchased products earn the coveted main places a greater burden on the vendor to coordinate its own
supplier position and defend their status against competi- activities and subsuppliers (Monczka, Trent, and Handfield
tors. Overall, our study’s findings suggest that a key sup- 2005, p. 278). Against this background, vendors must be
plier status indeed confers many substantial advantages to aware that “gaining a greater share of a customer’s business
vendors. For example, key suppliers typically capture a sig- does a supplier very little good when that incremental busi-
nificantly larger share of a customer’s business than do ness comes at the cost of reduced profitability” (Anderson
other suppliers. In our study, on average, main suppliers and Narus 2003, p. 48).
secured 73.3% of customers’ order volumes. In turn, second Our research raised and answered several conceptual,
suppliers captured only 19.5% of customers’ needs. Our measurement, and managerial issues. First, from a concep-
study further revealed that a vendor’s key supplier status tual perspective, a thorough investigation of how value is
may protect the firm from competition, at least in the short created in a supplier relationship was necessary. Building
run. For example, customers will work with key suppliers to on Cannon and Homburg’s (2001) classification of relation-
solve quality problems through joint teams. Similarly, main ship costs, we suggested an integrated framework that dis-
suppliers are granted an opportunity to adjust prices over tinguishes between two fundamental value-creating dimen-
time to match competition. Finally, key suppliers find them- sions and three levels at which these drivers operate.
selves in a better position to compete for new business Following a grounded theory approach, we asked managers
because they are typically involved early on in new product to identify and describe only those value drivers that allow a
development. supplier to set itself apart from competition and gain key

130 / Journal of Marketing, January 2006

 TABLE 3 dimensional construct. To account for its conceptual
Exploratory Factor Analysis breadth, empirical research should rely on formative multi-
dimensional scales of relationship value. Reflective models
Factor 1 Factor 2 Factor 3 of relationship value misconstrue the causal priority
(Sourcing (Core (Customer between the construct and its dimensions. However, they
Indicator Process) Offering) Operations)
are appropriate if relationship value is considered a uni-
Product1 .84 dimensional construct on a high level of abstraction. Both
Product2 .83 measurement approaches share 73% of their variance. Con-
Product3 .80 sequently, researchers may choose between a multidimen-
Product4 .86 sional scale with multiple items and its unidimensional
Product5 .85 counterpart with only few items, depending on their
Product6 .85
Service1 .66
research objectives. Relying on the multidimensional scale
Service2 .72 is key for research investigating the value-creating dimen-
Service3 .70 sions of a business relationship. For efficiency reasons,
Service4 .77 however, scholars might prefer the unidimensional scale
Delivery1 .72 when integrating value into a broader nomological network.
Delivery2 .73 Third, from a managerial perspective, our research pro-
Delivery3 .75 vides guidelines regarding each value driver’s potential for
Know-how1 .64
Know-how2 .83 differentiating among suppliers in a business relationship.
Know-how3 .70 To some extent, each value driver contributes to the expla-
Know-how4 .80 nation of observed variance in overall relationship value,
Know-how5 .87 and none of the differentiators should be neglected. How-
Time to market1 .74 ever, Table 5 shows that the potential for differentiation in a
Time to market3 .75 buyer–seller relationship varies considerably among the
Time to market4 .80
various value drivers.
Personal1 .81
Personal2 .84 Our results suggest that relationship benefits display a
Personal3 .83 stronger potential for differentiation than do cost considera-
Personal4 .80 tions. Whereas relationship costs account for little more
Personal5 .83 than 20% of the variance, relationship benefits explain
Personal6 .73 nearly four times as much. This is a noteworthy finding.
Personal7 .75 Conventional wisdom posits that customers emphasize cost
Variance considerations in business markets. Traditionally, the pur-
extracted (%) 28.4 24.4 23.2 chasing literature devotes particular attention to cost fac-
tors. For example, Anderson, Thomson, and Wynstra (2000,
p. 310) argue that “[p]urchasing managers are more knowl-
supplier status. The results of our qualitative study suggest edgeable about using price and price changes as a basis for
nine key differentiators in buyer–seller relationships: prod- selecting product offerings than value and value changes.”
uct quality, delivery performance, and direct product costs In addition, they recommend (p. 325) that “whenever possi-
at the level of a supplier’s core offering; service support, ble, suppliers should make resource allocation trade-offs in
personal interaction, and acquisition costs in the sourcing favor of internal cost reductions, which allow the supplier to
process; and supplier know-how, time to market, and opera- offer lower prices (or to postpone price increases), rather
tions costs at the level of the customer’s operations. To the than performance enhancements.”
best of our knowledge, this is the first conceptualization of Our findings provide a different picture, illustrating that
relationship value grounded in managerial practice. vendor selection criteria are highly context dependent.
Second, from a measurement perspective, we developed Exploring value creation in ongoing relationships and con-
items for each of the differentiators and consolidated them ducting value assessments of physical products follow two
into an overall index of relationship value. The results of different, yet complementary, logics. In the current study,
our cross-sectional study indicate that value creation in we focused on key supplier relationships as units of analy-
buyer–seller relationships can be not only conceptually sis. From this perspective, relationship benefits and costs
described but also empirically measured. This is an impor- take on two very different roles. Whereas cost factors serve
tant finding because scholars anticipated substantial diffi- as key criteria to get a supplier on the short list of those
culties in the empirical assessment of relationship value vendors considered for business, relationship benefits dom-
(Möller and Törrönen 2003; Parasuraman 1997; Wilson and inate when deciding which supplier to name first among a
Jantrania 1995). Because we cannot manage what we can- set of available suppliers. Following this line of reasoning,
not measure, our research represents an essential step cost competitiveness emerges as a necessary but not suffi-
toward adding managerial relevance to this “problematic cient condition to gain key supplier status. In turn, offering
concept which cannot be ignored” (Wilson and Jantrania superior benefits to the customer is essential for winning a
1995, p. 63). substantial share of a customer’s business.
We measured relationship value in two complementary In our examination of individual value drivers, we iden-
ways: (1) as a multidimensional construct and (2) as a uni- tified service support and personal interaction as core dif-

Value-Based Differentiation in Business Relationships / 131

 TABLE 4
Convergent and Discriminant Validity

A: Convergent Validity

Factor Indicator Loading t-Value AVE α

Core offering Product1 .83 32.75 75.0% .96

Product2 .91 70.72
Product3 .86 44.60
Product4 .86 33.03
Product5 .90 63.07
Product6 .91 63.79
Delivery1 .79 24.77
Delivery2 .86 49.61
Delivery3 .87 51.78

Sourcing process Service1 .83 32.26 73.8% .96

Service2 .83 30.38
Service3 .84 35.93
Service4 .85 38.61
Personal1 .88 46.76
Personal2 .90 69.03
Personal3 .88 48.51
Personal4 .90 53.32
Personal5 .88 52.64
Personal6 .84 38.32
Personal7 .82 26.55

Customer operations Know-how1 .75 23.53 72.6% .97

Know-how2 .86 37.08
Know-how3 .84 47.61
Know-how4 .87 56.21
Know-how5 .88 41.05
Time to market1 .86 44.91
Time to market3 .87 51.38
Time to market4 .87 53.71

B: Discriminant Validity

Core Offering Sourcing Process Customer Operations

Core offering .75

Sourcing process .55 .74
Customer operations .38 .63 .73
Notes: Bold numbers on the diagonal show the AVE. Numbers below the diagonal represent the squared correlations.

TABLE 5
Value Drivers’ Potential for Differentiation in Key Supplier Relationships

Relationship Value Dimensions

Sources of Value Creation Benefits Costs

Core offering Core benefits: Direct costs:

.11 × .77 = .08 .22 × .17 = .03

Sourcing process Sourcing benefits: Acquisition costs:

.68 × .77 = .52 .44 × .17 = .07

Customer operations Operations benefits: Operations costs:

.27 × .77 = .21 .61 × .17 = .10
Notes: Bold numbers show the variance explained by the formative value dimensions. We derive them by multiplying the path coefficients of the
second-order dimensions by the coefficients of the respective first-order dimensions in Figure 1. Overall, benefits account for 8% + 52%
+ 21% = 81% of explained variance. In turn, costs account for 3% + 7% + 10% = 20% of explained variance. Benefits and costs do not
add up to 100% because of rounding errors.

132 / Journal of Marketing, January 2006

ferentiators. In the current study, these sourcing benefits opportunity for backup suppliers to provide customers with
offer the strongest potential for differentiation, explaining the same product without needing to endure the burdens
more than half of the observed variance (52%). They are placed on the shoulders of the main supplier.
followed by operation benefits. A supplier’s know-how and
its ability to improve a customer’s time to market explain
21% of the observed variance. Operation costs (10% of Limitations and Future Research
observed variance), core benefits (i.e., product quality and Directions
delivery performance; 8% of observed variance), and acqui- As in any research project, the choices we made in this
sition costs (7% of observed variance) display a moderate study imply limitations in the interpretation of our results.
potential for helping a firm gain and maintain key supplier By focusing on understanding how a firm can differentiate
status. Finally, direct product costs (i.e., price) show the itself from competition, we limited our assessment to a spe-
weakest potential for differentiation in a key supplier rela- cific unit of analysis. Rather than showing how value is cre-
tionship (3% of observed variance). These findings suggest ated in buyer–seller relationships overall, our findings refer
that the core product and its price become less important to a particular context and research question.
differentiators in customer–supplier relationships. Offering First, we asked respondents to compare their main sup-
value through personal interaction and service, access to plier with a second supplier for routinely purchased prod-
know-how, and increased time to market has become ucts. Such a focus excludes the examination of other sup-
important in securing a key supplier position. plier relations (e.g., value creation by “me-too” suppliers,
However, note that managerial practice may well differ sole supplier relationships). Similarly, our research did not
from our findings at the level of individual firms. For exam- investigate the sourcing of other product categories, such as
ple, Noordewier, John, and Nevin (1990) suggest that repet- capital goods.
itively used items and capital goods greatly differ in terms Second, data for our research are based on the cus-
of acquisition and possession costs.2 Indeed, repetitively tomer’s perspective of value creation in key supplier rela-
used items involve significant order-handling and inventory tionships. A vendor’s point of view might be different.
management costs. In such a context, suppliers create value Additional research could examine potential gaps between
for customers by taking cost out of the sourcing process. In both parties’ value perceptions.
turn, capital goods require a thorough understanding of how Third, our research relied only on single respondents.
the equipment helps customers reduce operation costs Other members of the buying organization might emphasize
throughout the product’s life cycle. In such an environment different value drivers in a key supplier relationship.
(i.e., in which the interpurchase intervals are much longer), Because we cannot exclude potential biases, further
managers base their decisions on payback periods and dis- research could address this limitation usefully.
counted cash flow analyses (Nordewier, John, and Nevin Fourth, the choices we made in developing our sample
1990). Nevertheless, our results represent a point of depar- frame warrant some caution in the generalization of our
ture for managerial decision making. Because of the cross- findings. We sampled respondents among members of the
sectional nature of the quantitative study, our findings pro- ISM. This approach might favor the inclusion of better-
vide a best-practice profile for companies striving for key educated purchasing professionals and larger buying
supplier status. Our sample consists of winners only; that is, organizations.
our analysis is based on data gathered from suppliers that Fifth, this research focused on dyadic business
successfully made their way to the top of the supply base. exchange relationships. However, buyer–seller relationships
Consequently, our results deliver an informative benchmark are embedded in complex networks of relationships (Achrol
for vendors of routinely purchased products that want to 1997; Anderson, Håkansson, and Johanson 1994; Ford
gain or maintain key supplier status. 1990). Thus, further research could examine value creation
On a final note, our study also provides interesting in the broader network surrounding a customer and its key
insights for secondary suppliers. By adopting a “Trojan supplier.
horse” approach, a secondary supplier may break down an Sixth, although we paid careful attention in the assess-
existing market offering into individual components and ment of content and predictive validity, we did not raise the
focus on a single product or service (Rust, Lemon, and issue of nomological validity. Integrating value into the
Narayandas 2005, p. 313). Having established a foothold in nomological network of relationship marketing remains a
a customer account, the supplier then can progressively promising opportunity for further research (Hogan and
expands its share. A secondary supplier may also develop a Armstrong 2002, p. 19).
unique expertise and provide selected customers with a bet- Finally, scholars have called for more longitudinal
ter solution at a lower cost. The supplier then can offer this research on buyer–seller relationships (Narayandas and
capability for a reduced fee in exchange for an incremental Rangan 2004). More must be learned about how value is
share of a customer’s business (Anderson and Narus 2003). created over time in close supplier–customer relationships.
Finally, a backup supplier can take advantage of the grow- Further research using a longitudinal design could address
ing trend toward cross-sourcing among buying organiza- this issue.
tions (Newman 1989). Cross-sourcing not only helps cus- These limitations should be kept in mind when consid-
tomers mitigate supply risk but also opens a window of ering our results and their implications. Nevertheless, our
findings provide new insights for academics and practition-
2We thank an anonymous reviewer for this insight. ers alike.

Value-Based Differentiation in Business Relationships / 133

 APPENDIX
Operational Measures

M SD

Product Support
Product1 Compared to the second supplier, the main supplier provides us with better product
quality. 4.55 1.59
Product2 Compared to the second supplier, the main supplier meets our quality standards
better. 4.62 1.60
Product3 Compared to the second supplier, the main supplier’s products are more reliable. 4.47 1.59
Product4 Compared to the second supplier, we reject less products from the main supplier. 4.60 1.69
Product5 Compared to the second supplier, the main supplier provides us with more consistent
product quality over time. 4.69 1.60
Product6 Compared to the second supplier, we have less variations in product quality with the
main supplier. 4.53 1.68
Service Support
Service1 Compared to the second supplier, the main supplier provides us with better services. 4.92 1.52
Service2 Compared to the second supplier, the main supplier is more available when we need
information. 4.63 1.54
Service3 Compared to the second supplier, the main supplier provides us with more
appropriate information. 4.83 1.65
Service4 Compared to the second supplier, the main supplier responds faster when we need
information. 4.74 1.50

Delivery
Delivery1 Compared to the second supplier, the main supplier performs better in meeting
delivery due dates. 4.83 1.65
Delivery2 Compared to the second supplier, we have less delivery errors with the main
supplier. 4.74 1.68
Delivery3 Compared to the second supplier, deliveries from the main supplier are more
accurate (no missing or wrong parts). 4.77 1.69

Supplier Know-How
Know-how1 Compared to the second supplier, the main supplier provides us a better access to
his know-how. 4.68 1.59
Know-how2 Compared to the second supplier, the main supplier knows better how to improve our
existing products. 4.73 1.55
Know-how3 Compared to the second supplier, the main supplier performs better at presenting us
with new products. 4.81 1.52
Know-how4 Compared to the second supplier, the main supplier knows better how to help us
drive innovation in our products. 4.77 1.69
Know-how5 Compared to the second supplier, the main supplier knows better how to assist us in
new product development. 4.37 1.48

Time to Market
Time to Compared to the second supplier, the main supplier performs better in helping us 4.48 1.50
market1 improve our time to market
Time to Compared to the second supplier, the main supplier helps us more in improving our 4.55 1.57
market2 cycle time.
Time to Compared to the second supplier, the main supplier helps us more in getting our 4.40 1.58
market3 products to market faster.
Time to Compared to the second supplier, the main supplier performs better in helping us 4.61 1.55
market4 speed up product development.

Personal Interaction
Personal1 Compared to the second supplier, it is easier to work with the main supplier. 4.89 1.61
Personal2 Compared to the second supplier, we have a better working relationship with the main
supplier. 5.07 1.52
Personal3 Compared to the second supplier, there is a better interaction between the main
supplier’s people and ours. 5.07 1.54
Personal4 Compared to the second supplier, we interact better with the main supplier. 4.91 1.57
Personal5 Compared to the second supplier, we can address problems more easily with the
main supplier. 4.83 1.56
Personal6 Compared to the second supplier, we can discuss problems more freely with the main
supplier. 4.69 1.59
Personal7 Compared to the second supplier, the main supplier gives us a greater feeling of
being treated as an important customer. 4.72 1.63

134 / Journal of Marketing, January 2006

 APPENDIX
Continued

M SD

Relationship Value
RELVAL1 Compared to the second supplier, the main supplier adds more value to the
relationship overall. 4.99 1.51
RELVAL2 Compared to the second supplier, we gain more in our relationship with the main
supplier. 4.93 1.45
RELVAL3 Compared to the second supplier, the relationship with the main supplier is more
valuable. 5.01 1.51
RELVAL4 Compared to the second supplier, the main supplier creates more value for us when
comparing all costs and benefits in the relationship. 5.01 1.49

Relationship Costs
How do each of the following costs of the main supplier compare with the costs of your second-best supplier?

Main Main Main Main

Supplier’s Supplier’s Main Supplier’s Supplier’s
Costs Are Costs Are Supplier’s Costs Are Costs Are
Much Somewhat Costs Are Somewhat Much
Lower Lower the Same Higher Higher M SD
Purchasing
price 2.51 1.02
Ordering
costs 2.61 0.72
Delivery
costs 2.63 0.89
Inventory
carrying
costs 2.60 1.81
Coordination
and com-
munication
costs 2.52 0.83
Manufacturing
costs 2.62 0.84
Downtime
costs 2.57 0.86

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