Governance of Buyer-Supplier Relationships in Supply Chains: A Theoretical Perspective

Abstract

Buyer –supplier relationships in supply chains are becoming increasingly important as buyers realize that their success is often tied to the capabilities and performance of suppliers. However since the manufacturer and the supplier are separate entities with each having individual goals, it is not definite that the supplier will support the manufacturer’s request and vice versa. As a result exchange partners are said to be more confident about cooperative activities when they feel that they have an adequate level of control over the actions of their partners. Therefore, the need to manage a manufacturer’s relationship with its suppliers has been discussed in literature over a long period of time. Thus the aim of this paper is to discuss how the supplier governance mechanisms have been identified in literature during the last decade. According to the literature, the manufacturing firms can draft legal contracts or create formal structures allowing suppliers’ financial resource (formal governance) or establishing strong ties that serve as part of the social control mechanism (relational governance) which governs partnership behaviours or maintains a combination of both. Many argue that formal contracts actually undermine trust and thereby encourage the opportunistic behavior which they are supposed to discourage. The benefits of relational ties are also questioned in the case of repeated partnerships. Reviewing the literature it could be concluded that it is important for organizations to understand the organizational context (power relationship and competition intensity) in which the relationship exists, the complexities introduced by uncertainty and the circumstances in which they are applied in order to establish a win-win situation through the governance mechanisms.