No firm is an island: Why buyers should probe a supplier's network

January 14, 2009

For any shopper who noticed how the price of hamburger and lettuce jumped after gas prices soared last year, this should come as no surprise: Buyers eventually feel the pinch when their suppliers' expenses surge.

The reason? Buyers and sellers operate within networks that exceed the one-on-one, buyer-seller bond. That's why Thomas Choi, a professor of supply chain management at the W. P. Carey School of Business, thinks supply chain professionals would be wise to look beyond the supplier to its supply network. Without it, he argues, buyers are not examining all the factors affecting the strength and reliability of the suppliers they choose. Such shortsightedness leaves buyers vulnerable to supply troubles and missed opportunities.

Missing links

In traditional supply-management studies, the focus is on the pair, or the dyad, formed by buyers and sellers. Choi, who borrows from the field of social-network research, adheres to the notion that it is not dyads that end with a supplier, but triads that take us one step beyond the immediate supplier, that are the network relationships buyers should be eyeing.

Networks, he explains, consist of nodes and links. If company A decides to buy products from company B, each company is a network node, and the link between them is the flow of materials. That structure -- two nodes and one link -- is a dyad, the network unit studied by most supply chain researchers and practitioners. But, "They're missing the boat," says Choi.

"Network theorists have argued that it's the triad, not the dyad, that is the fundamental building block of a network," he continues. A triad consists of three nodes and three links, so it factors in the external forces that might affect individual nodes and their one-on-one dyadic links.

"When you evaluate a supplier, you shouldn't look at that supplier in isolation," Choi says. "Your supplier will have relationships with other suppliers and buyers that you may not know about, but those relationships can affect your business."

To get the broadest perspective, customer companies "need to consider how a supplier is embedded in its own network to fully gauge its performance," Choi writes in a paper that he co-authored with Yusoon Kim, a Ph.D. candidate at the W. P. Carey School.

As a case in point, Choi and Kim describe a successful car manufacturer that was having trouble getting parts from a supplier. Why? A second customer of that supplier -- an unsuccessful automaker -- was having financial troubles, which cascaded into money troubles for the supplier. Eventually, the supplier went bankrupt. "In the future, when we select a major supplier, we are going to review carefully who its key customers are," said a senior executive with the successful auto-making firm.

Triple play

In Choi's view, that's a smart idea. "Once we start to think about triads, there are all kinds of things to consider," he notes.

Maybe your resource switches suppliers in its own network, and product quality suffers. That happened to one aerospace company Choi and Kim cover in their writing. The aerospace firm picked a supply company based on its technical capabilities and financial stability. Still, quality tanked when the supplier in this arrangement "brought on a new, second-tier electronic parts supplier," the researchers note. "The aerospace company eventually chose to directly manage this second-tier parts supplier" itself in order to get the product quality it required.

Or, consider the information technology company the researchers report on. In building out telecommunications infrastructure, the IT firm relied on two other supplying companies and, in an effort to control costs, it asked those two companies to work together and coordinate their activities. They wouldn't. In fact, "The effort and resources that this information technology company expended to get the suppliers to work together came to nothing," the W. P. Carey scholars write. A supplier would not necessarily cooperate with another supplier just because it was told to do so by the buying company. Obvious? But many buying companies often forget it is one thing for a supplier to do what they are told in their own operation but it is an entirely different thing to get the supplier to do something beyond its own four walls, like working with another supplier.

Ties that bind

According to Choi and Kim, once buying firms "establish a relationship with a supplier, they are linked, indirectly and unwittingly, to the supplier's business networks."

The view fits with social-network theories on structural embeddedness which, they explain, hold that "dyads constitute triads; triads become the building blocks of higher-order subgroups; and all are embedded in a larger network structure." What's more, that larger structure has the potential to impact all individual nodes in the network. In other words, both direct and indirect relationships can affect the suppliers that you, a buying company, are relying on.

As an example, Choi and Kim point to Honeywell. In its airplane-engine manufacturing operations, the organization taps suppliers of raw materials such as copper or steel, but it doesn't interact with metal-mining companies. Still, when a savvy mining operation improved its performance by adding medical x-ray technology to its processes, Honeywell benefited down the line.

Does this mean supply-management professionals should probe through several layers of their suppliers' networks? It couldn't hurt.

Among the benefits of understanding suppliers' networks, Choi and Kim cite smoother operations and stronger financial performance for the buying company. Plus, network knowledge reveals opportunities that could lead to gain. For example, you might choose to stick with a lesser-known or poor-performing supplier "if this supplier is connected to other promising companies." Or, knowing how a supplier is embedded in its own supply network may come in handy if you need to manage second- or third-tier suppliers yourself.

At bottom, the researchers say, a supplier's embeddedness in its own networks offers another lens to peer through -- a point of evaluation -- for buyers to use in decision-making. Knowing more about your suppliers' networks helps you better forecast those companies' ability to meet your corporate needs today and remain strong tomorrow.

Bottom Line:

  • A buying company should not view suppliers as operating in isolation. A supplier’s performance depends on its own business network.
  • Social-network researchers maintain that social networks consist of "nodes," or agents, and the links between them, which could be a buying and selling arrangement.
  • Network researchers also maintain that the smallest unit in a network is not a dyad, but a triad, which reflects the multiple elements that may be influencing a node in the network.
  • Supply-management practitioners and experts traditionally have focused on the supply dyad: buyers and sellers.
  • Dyads fall short as an analytic framework because sellers may have other buyers they're selling to, plus they have their own suppliers. This means triads exist.
  • Triads are the smallest unit that permits us to investigate how a buyer-supplier dyad is embedded in another node (i.e. another buyer or another supplier) and another link (i.e. another buying-selling arrangement).
  • Since buyers and sellers operate within networks, supply-management professionals should look at triads in the networks to which suppliers belong, as well a supplier's conditions of embeddedness in its own networks.