A personal connection increases the likelihood a buyer would select a supplier by 60% ©  Compassionate Eye Foundation/Mark Langridge/Getty Images
A personal connection increases the likelihood a buyer would select a supplier by 60% © Compassionate Eye Foundation/Mark Langridge/Getty Images

Contracts more relaxed when buyers and suppliers have prior connection

Will Green is news editor of Supply Management
24 July 2020

Contracts between buyers and suppliers who have a connection through prior work or education last on average six months longer than those without such a connection, according to research.

The study, by the Olin Business School, part of Washington University in St Louis in the US, found personal connections increased the likelihood a buyer would select a supplier by 60% over baseline probability.

The effect was stronger among C-suite connections compared to lower-level executives, while the COO – who the study said oversaw most firms’ supply chains – had a more pronounced effect than the CEO or CFO.

Xiumin Martin, professor of accounting at Olin Business School, said: “The Covid-19 crisis has significantly disrupted supply chains.

“It will be interesting and important to examine whether personal connections have an influence in counteracting such disruptions and fostering a more resilient and robust supply chain network.”

The researchers studied data sets including long-running business relationships between 2,630 customers and 1,430 suppliers, focusing on two relationships: university and work. They discovered 7.4% of the sample had education connections and 21% had either educational or past-work relationships.

The study found 27% of contracts were between connected parties and on average these lasted 48 months, compared to 42 months for parties with no connection.

Researchers looked at factors including product quality and reputation, delivery reliability, cost competitiveness, financial risk and production flexibility in relation to customer requests.

Prior connections resulted in more relaxed terms in procurement contracts, improved firms’ operating efficiency, smoothed out exchanges of information and expanded geographical areas to find supply chain partners when choices were limited nearby.

“Simply put, these businesses know one another. And that enabled them to make more accurate assessment of supply chain risks, helped to reduce costs, facilitated more timely updates and improved the effectiveness of monitoring the supplier along the chain,” said the researchers.

“The less restrictive contract terms translated into product warranties, the ability to inspect supplier’s plants, supplier-paid liability or property insurance, and pre-scheduled periodic meetings often used to address risk and moral-hazard issues.”

The study found when the connection was broken – such as one of the parties leaving their employer or retiring – the customer-supplier relationship ended earlier after the departure of a connected executive compared to an unconnected one.

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