Abstract
Background: The South African automotive industry includes complete supply chains. The South African automotive supply chain stakeholders operating within the global arena are faced with opportunities as well as challenges. The South African government supports the automotive industry and encourages the vision to drastically expand the industry by the year 2020. However, having to adhere to strict prescriptions from customers regarding product quality and logistics, automotive component suppliers have only the actual relationship with customers through which value can be added. Literature acknowledges the importance of relationship value and agrees that it results in business retention. However, literature fails to prove whether relationship value can result in business expansion where more business is generated.
Objectives: The objective of this article was to provide a better understanding of how to optimise relationship value within the South African automotive supply chains between Tier 1 and Tier 2 suppliers. Furthermore, the correlation between relationship value and business expansion was tested through a linear regression model. It was also important to determine whether supply chain stakeholders from different countries of origin and cultural backgrounds attach the same importance to relationship value.
Method: This article reports on research which followed a positivistic paradigm, through a quantitative study undertaken in the South African automotive supply chains. Members of the National Association for Automobile Component and Allied Manufacturers of South Africa (NAACAM), defined as Tier 1 suppliers, were approached to describe their best Tier 2 suppliers. Questions relating to relationship value and business expansion were asked via a closed-ended questionnaire. The aim was to obtain the perceptions of Tier 1 suppliers of their best Tier 2 suppliers in terms of relationship value and business expansion. The data were analysed through a linear regression model.
Results: It was found that relationship value directly correlates with business expansion and is therefore highly regarded as important by Tier 1 suppliers in terms of their Tier 2 suppliers in the South African automotive supply chains. Notwithstanding the different countries of origin, respondents are in agreement regarding the importance of relationship value.
Conclusion: As the South African automotive industry plays an important role in the South African economy, all efforts should be made to retain and expand the industry. The industry is characterised by a difficult economy, and supply chain role players should constantly investigate new strategies to gain a competitive advantage. It was found that there was a high regard for relationship value which could result in business expansion. Automotive component suppliers are encouraged to invest in a relationship value governance strategy to actively pursue added benefits for all stakeholders.
Introduction
Companies within a supply chain environment retain suppliers either because they have to or because they want to (Geiger et al. 2012:83). Generally, supply chain role players aim to build effective relationships with suppliers (or partners) in order to ensure the best quality and supply chain performance (Li et al. 2012:5445). Value created within the supply chain results in a competitive advantage (Ambe 2014a:47) and when value is created by means of the relationship with supply chain partners, it is known as relationship value (Yeh 2016:138). In current difficult economic times, it might be worthwhile investigating solutions in terms of relationship value offerings to sustain and even expand business in the global supply chains.
According to Geiger et al. (2012:83), relationship value can be defined as the total sum of benefits and sacrifices generated through a long-term relational exchange between two partners in the supply chain. Relational exchange entails the interaction between two partners, where value is added (Bagozzi 1975:33). When no value is added, there is little or no reason to maintain the relationship with a partner (Bagozzi 1975:33; Li 2010:313). Eggert, Ulaga and Schultz (2006:21) and later Barry and Terry (2008:229) suggested that relationship value comprises a relational exchange generated by products and services (core offering), the sourcing process or customer operations within supply chains. The ultimate reason for why companies invest in relationship value within the supply chain is because relationship value promises to lead towards retention (Sun et al. 2014:79).
Even though relationship value is believed to be important, its conceptualisation within the supply chains remains limited (Barry & Terry 2008:228) and thus, more empirical research is required (Wagner, Eggert & Lindemann 2010:845). The literature also suggests that there is room for new knowledge with regard to a more robust conceptualisation of relationship value constructs within the South African automotive supply chains (Tolmay & Badenhorst-Weiss 2015:2). Relationship value enhances various advantages and might lead towards business retention (Geiger et al. 2012:90; Parry et al. 2012:713; Sun et al. 2014:80; Walter, Mueller & Helfert 2000:1). However, literature fails to indicate whether relationship value can lead towards business expansion where more orders and eventually a larger turnover will be realised for the supplier (Lynch & Jin 2016:119).
The automotive industry is the most important manufacturing sector in South Africa and follows the supply chain approach to the fullest extent (Tolmay & Badenhorst-Weiss 2015:1). The sustainability of the industry and its stakeholders is of the utmost importance to the South African economy – it contributed 7.5% towards the country’s gross domestic product (GDP) in 2015 (AIEC 2016:8). Moreover, the industry comprises various layers (or tiers) of suppliers providing components and modules to the automotive assemblers or original equipment manufacturers (OEMs) (Tolmay & Badenhorst-Weiss 2015:1). The South African government supports the automotive industry through various industry incentives, and since 2013, it has introduced an initiative to not only retain but expand vehicle production to double vehicle production to one million units by 2020 (AIEC 2016:21). This means that automotive supply chain stakeholders have to produce more and increase their business in order to secure business expansion in line with government’s view.
Although the government’s focus is on increased business and production, the South African automotive industry is confronted by various challenges that include intense global competition, delayed reaction to changing market forces, reduced price pressures, unreliability of transport and high logistical costs (Ambe 2014b:1539–1540; Tolmay 2012:5). Also, as the South African automotive industry is represented by role players from diverse countries of origin, it should be taken into consideration that cultural differences may play an important role in planning supply chain strategies (Ambe 2014a:48; Cadden, Marshall & Cao 2013:87). Relationship value may have distinct perspectives across nations (Barry & Terry 2008:228), and the research reported on in this article determined whether higher levels of relationship value will result in business expansion across companies with diverse cultural backgrounds.
With all these challenges threatening the sustainability of the South African automotive industry, and in the vision of the South African government to grow the industry, it is crucial to add additional value in order to sustain and even expand the industry, and one such way might be through relationship value (Sun et al. 2014:79).
This article reflects on research conducted between first- and second-tier suppliers (component manufacturers) in the South African automotive supply chains, and it specifically reports on the findings regarding the perceptions on relationship value and its correlation with business expansion. The aim of this article is to provide a better understanding of how to shape supplier collaboration and optimise relationship value in the South African automotive supply chains. It further aims to determine whether relationship value might ultimately result in not only business retention but also business expansion. The research question that is addressed is: Can higher relationship value lead towards business expansion in the South African automotive supply chains between first-tier and second-tier suppliers?
This article will thus firstly explore the literature regarding the South African automotive supply chains and the importance of relationship value between supplier and customer. Literature reflections on supply chain management and close collaboration between supply chain partners will also be presented. This is then followed by an explanation of the research methodology applied in the study and finally, the analysis, findings and recommendations will be presented.
Literature review
The South African automotive industry
Global vehicle production in 2015 rose by 1.1% to reach a record of 90.88 million vehicles, up from the 89.78 million units produced in 2014 (AIEC 2016:18). Nineteen countries topped the one million mark in 2015, which is regarded as an internationally significant vehicle production level. South African vehicle production increased to a record 615 658 vehicles in 2015, up from the 566 131 units produced in 2014 – a gain of 49 527 vehicles or 8.7% (AIEC 2016:18). South Africa improved its global ranking to 21st (24th in 2014) in the world, with a market share of 0.68% (AIEC 2016:18).
Although the South African automotive industry is ranked only 21st in global vehicle production, it is the largest contributor to the country’s GDP, namely, a contribution of 7.5% (AIEC 2016:9). The South African automotive industry remains the most critical sector that drives sustainability, job creation and economic growth (AIEC 2015:9; Ambe 2014c:638). The South African government is actively involved in supporting the automotive industry though various initiatives with the vision to drastically expand the industry production by the year 2020 (AIEC 2016:21).
South Africa’s truly global automotive supply chain is represented by seven OEMs in three automotive clusters, namely, Gauteng, Eastern Cape and KwaZulu-Natal (Ambe 2014c:638) (see Table 1). These OEMs are from different countries of origin, such as Europe, Asia and America. In recent studies, Ambe (2014a:59, 2014c:638) found that cultural diversities play an important role, and thus, significantly different approaches to supply chain strategy between OEMs of different countries of origin are visible.
| TABLE 1: Automotive original equipment manufacturers represented in South Africa. |
The automotive supply chain is mainly dictated by the parent companies of the OEMs that have tight and long-term supply chain management relationships (Ambe 2014a:50, 2014c:638). Therefore, the Tier 1 supplier (direct supplier of modules to the OEM) is usually of the same country of origin as the OEM and usually comprises the same strategic supply chain management focus (Ambe & Badenhorst-Weiss 2013:6).
The South African automotive industry manufactures a broad range of vehicles, including passenger cars, light commercial vehicles, medium commercial vehicles, heavy commercial vehicles, extra heavy commercial vehicles and buses (AIEC 2016:9). The study reported on in this article only focused on the supply chain of light commercial vehicles or passenger cars and investigated relationship value between first- and second-tier suppliers in the South African automotive supply chains.
Supply chain management in the global arena poses many opportunities, but also a number of risks for supply chain stakeholders (Ambe 2014b:1539). With the various challenges of supply chain management, such as shorter life cycles in an ever-changing global arena, companies tend to strive towards supplier rationalisation where closer relationships are fostered with fewer suppliers to secure optimised performance and cost savings (Ambe 2014b:1539; Cadden et al. 2013:87). The South African automotive supply chain is no exception to this and is faced with challenges such as intensified global competition with the main aim of cost reduction, low levels of global co-operation, low market reaction and numerous logistical challenges (Ambe 2014b:1540). In addition to these challenges, Tolmay and Badenhorst-Weiss (2015:3) believed that automotive component suppliers are dealing with more sophisticated and knowledgeable customers with rapidly changing buying patterns. It therefore would make sense to seek superior supplier relation strategies in order to overcome these challenges and to secure success (Ambe 2014a:47, 2014c:638; Tolmay & Badenhorst-Weiss 2015:3).
It should further be noted that the South African automotive supply chains are represented by companies with various countries of origin and diverse backgrounds and approaches (Ambe 2014a:48). These cultural diversities play a role in planning supply chain management strategies and should at all times be taken into consideration (Ambe 2014a:48, 2014c:638; Cadden et al. 2013:87). Different supply chain strategies might change relationship value requirements, and it is important to determine what is valued the most in order to secure long-term supply chain optimisation (Barry & Terry 2008:228). As OEMs and their suppliers originate from different cultures, it could be argued that these cultures influence their vision and supply chain strategy, including the relational exchange with suppliers within supply chains (Ambe 2014c:638; Cadden et al. 2013:87).
Supply chain management
Supply chain management involves close co-operation with upstream and downstream suppliers, and the automotive industry leads in this field through long-term relational exchange (Cadden et al. 2013:87; Tolmay & Badenhorst-Weiss 2015:3). Moreover, Li (2006:118, 2012:5445) and Ambe (2014a:47) pointed out that supply chain management practices are based on supplier partnerships, customer relationships and information sharing and that relational benefits tend to connect all the stakeholders across the supply chain. According to Yeh (2016:138), supply chain management aims to identify the most appropriate partners and suppliers, as well as raw materials and product efficiency, in order to create superior value in the long run.
Within supply chain management, supply chain collaborations are formed with appropriate partners in the supply chain with the ultimate aim to add value (Tolmay & Badenhorst-Weiss 2015:1). This collaboration, according to Wisner, Tan and Leong (2016:528), means the working together with suppliers and customers through the sharing of information on various activities. This supply chain collaboration is viewed as a discipline within supply chain management (Figure 1). The supply chain collaboration specifically refers to the personal interaction between supply chain partners on a daily basis. Supply chain management constantly evaluates suppliers and then determines whether to maintain, terminate or invest in new supply chain collaborations (Yeh 2016:138). Therefore, suppliers should constantly ensure that they add sufficient value towards their customer.
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FIGURE 1: Conceptual view on supply chain management, with supply chain collaboration and relationship value. |
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According to Yeh (2016:138), supply chain activities pose an ideal opportunity to increase value. Therefore, a strategic supply chain approach should be followed in order to enhance competitiveness and sustainability for supply chain role players (Yeh 2016:137). Research studies have suggested that relationship value forms part of supply chain collaboration where more value is added through the actual relationship between supply chain partners (Yeh 2016:137) (Figure 1). This article will thus examine the correlation between relationship value within supply chain collaboration in more detail.
Relationship value within supply chain collaboration
Relationship value can be conceptualised as the total sum of benefits and sacrifices generated over a long-term relational exchange (Geiger et al. 2012:84). Eggert et al. (2006:21), as well as Barry and Terry (2008:229), stated that relationship value encapsulates benefits and sacrifices. Relationship value benefits comprise a core offering, a sourcing process and customer operations in the supply chain (Eggert et al. 2006:21). The core offering is inclusive of all aspects relating to the quality and performance of the actual product as well as the delivery performance, such as logistical activities, by the supplier. The sourcing process includes service supports such as customer information and personal interaction such as communication and problem-solving abilities. The customer operations are inclusive of customer know-how relating to knowledge, as well as time-to-market relating to prototype development and testing (Barry & Terry 2008:229; Eggert et al. 2006:21). All these relationship value activities mentioned form part of supply chain collaboration (Wisner et al. 2016:528) and can therefore be viewed as the centre of supply chain collaboration (Figure 1).
Higher relationship value is viewed by various authors as important (Eggert et al. 2006; Geiger et al. 2012:84; Sun et al. 2014:80; Yeh 2016) (Table 2), and the ultimate purpose of relationship value in the supply chain is to work together with the aim of realising benefits for both parties (Sun et al. 2014:80). Relationship value creates superior value in a supply chain and increases trust and commitment (see Table 2). The financial benefits of relationship value (Geiger et al. 2012:83) promise to reduce cost (Li 2010:314; Moon 2011:47; Sun et al. 2014:79; Yeh 2016:138) and result in business retention (Sun et al. 2014:79) (see Table 2). With more research required on business expansion (Lynch & Jin 2016:11), literature fails to indicate whether relationship value increase business (or business expansion) which was investigated in the South African automotive supply chain.
| TABLE 2: Authors reflecting on benefits of relationship value. |
As the literature proposes that higher relationship value results in business retention, more empirical research should be undertaken (Sun et al. 2014:79), also within the South African automotive supply chains (Badenhorst-Weiss & Tolmay 2016:10). These limitations in literature spurred the research in the South African automotive supply chains reported on in this article. With various challenges facing the South African automotive supply chain, it would make sense to invest more in relationship value with the promise of retaining and even expanding business. With stringent prescriptions from customers, supply chains offer limited opportunities for differentiation through production, price and logistics, and component suppliers are left with only relationship value to differentiate themselves (Yeh 2016:137). As automotive supply chain stakeholders represent different backgrounds and countries of origin, it is important to determine whether these stakeholders attach the same importance to relationship value.
Yeh (2016:138) calls the management of relationship value ‘relational governance’ where supply chain role players maintain a long-term relational exchange with partners. This relational governance, according to Yeh (2016:135), is inclusive of planning, adjustment and monitoring of relational activities to achieve the desired results for both parties. However, it is important to note that relational governance should be actively and directly managed to influence the formation and maintenance of relationship value between parties (Yeh 2016:139). Through the management of relational governance, both parties have to understand their partners and their distinctive activities in the supply chain, in order to add maximum value under various circumstances (Yeh 2016:149).
The methodology towards testing the correlation between relationship value and business expansion in the South African automotive supply chain is explained in the section dealing with the research approach.
Empirical study
Background and methodology
The research reported on in this article followed a positivistic paradigm, and a quantitative research method was applied (Saunders et al. 2009:138). Causality was determined by measuring customer’s perspectives of their suppliers by utilising a survey approach.
The research was conducted in the South African automotive supply chains and specifically focused on the perceptions of the first-tier suppliers in the supply chain (customer in relationship) with regard to relationship value with second-tier suppliers (supplier in the relationship). As the majority (approximately 70%) (NAACAM 2016, http://www.naacam.co.za) of first-tier suppliers are members of the National Association for Automobile Component and Allied Manufacturers of South Africa (NAACAM), managers of the member companies were interviewed. A quantitative research methodology was followed where the management of NAACAM member organisations was asked about perceived relationship with their best Tier 2 suppliers.
The questions for the structured questionnaire were obtained from a survey utilised by Eggert et al. (2006:26). After a qualitative questionnaire validation process had been conducted within the automotive industry, questionnaires were forwarded to all management representatives of the NAACAM database via email accompanied by an ethical clearance letter. Participation was voluntary, but non-respondents were followed up telephonically after 1 month, and telephonic interviews were conducted with them if they agreed to be interviewed.
Profile of respondents
The researcher obtained questionnaires from 114 respondents out of the 140 that were sent out, securing a response rate of 81.4%. The data contained in the questionnaires were captured using SPSS, although not all respondents answered all the questions.
As it was important to sample companies with different countries of origin, respondents were asked about their different shareholding profile. A total of 106 out of the 114 respondents indicated their company’s shareholding, of which 29.2% (31) indicated that their company had local shareholding, 44.3% (47) indicated international shareholding and 26.4% (28) said that their company had a mixture of local and international shareholding (see Table 3).
| TABLE 3: Company shareholding profile of respondents. |
The spread of shareholding profiles was deemed satisfactory and suggested a good spread of local and international shareholding.
Analysis and findings
This article reports on the relationship value in the South African automotive supply chain and its directional correlation with business expansion which was tested through a linear regression model.
Three items relating to the dimension of relationship value were included (see Table 4). Business expansion was utilised as a single observation. A bipolar seven-point semantic differential scale was used in the questionnaire ranging from ‘strongly disagree’ to ‘strongly agree’.
The first step was to conduct a principal component analysis (using principal component extraction and varimax rotation) to determine the unidimensionality of the relationship value construct (business expansion was viewed as a single observation).
The Kaiser–Meyer–Olkin Measure of Sampling Adequacy was 0.714, which is above the acknowledged threshold of 0.5, and the Bartlett’s Test of Sphericity was significant (p < 0.001) for relationship value, indicating that factor analysis was appropriate.
The analyses confirmed unidimensionality for relationship value, as the analyses recognised only one factor, based on the eigenvalue criterion (eigenvalue > 1). The factor loading of relationship value as a single factor is reflected in Table 4 and explains 73.3% of the variance.
Using Cronbach’s alpha, the internal consistency (reliability) for relationship value was found to be 0.812, and business expansion was utilised as a single observation (Table 4). The factor-based score for relationship value was calculated as the mean score of the variable included in the factor.
The mean scores revealed that respondents were in agreement about the importance of relationship value and business expansion (5.74 and 5.62, respectively) (see Table 4).
As shown in Table 5, a linear regression is used to evaluate the directional relationship between the independent variable (relationship value) with the dependent variable (business expansion). As a result, the regression model reveals that relationship value is a strong positive statistical significant predictor (at the 1% percentile of statistical significance) of business expansion.
It can be reported from that relationship that value strongly relates to business expansion in the South African automotive supply chains (Figure 2). Therefore, it can be argued if relationship value is increased, this will result in business expansion.
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FIGURE 2: Business expansion consideration sets. |
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Within supply chain management, supply chain collaboration refers to the daily interaction with supply chain partners. This supply chain collaboration suggests enhancing relationship value which ultimately results in business expansion. Although literature alludes to the fact that relationship value may result in business retention, the finding of this research is unique as it indicates that business will actually expand with more business to be realised.
According to the items utilised in the questionnaire (Table 4), customers perceived the relationship value from their suppliers as added value resulting in more benefits. Customers further perceived that their suppliers with higher relationship value hold them in higher regard, and therefore, they will be willing to expand their current business with their valued suppliers.
The implications of the findings for the South African automotive supply chain are discussed in the conclusion and recommendations.
Conclusion and recommendations
Intensified globalisation provides numerous opportunities, but also a fair share of challenges for role players in the South African automotive supply chains. The South African automotive industry participates in the global automotive industry and performs an important role in the country’s economy. Not only the sustainability but also the expansion of the South African automotive industry is thus of utmost importance as this industry contributes greatly towards the country’s GDP.
This article presented the problems of South African automotive component suppliers, such as shorter life cycles, pricing demands and more sophisticated and knowledgeable customers. As Tier 1 suppliers are represented by different countries of origin and by different supply chain value strategies, the aim was to better understand the automotive component customers’ views on relationship value. Relationship value through strategic supplier strategies promises to add maximum value to supplier relationships and is likely to result in not only business sustainability, but actually business expansion where additional business is generated.
With little room for differentiation through product, logistics and quality, literature suggests that differentiation in the supply chains can be achieved by means of increased relationship value. Relationship value can be defined by the sum of total benefits with total sacrifices received from the supplier. According to authors such as Eggert et al. (2006:21), relationship value benefits comprise a core offering, which consists of products and services, the sourcing process and customer operations. As the literature provides proof that relationship value is a contributing factor towards business retention, it leaves a void on whether relationship value results in business expansion within the South African automotive supply chains.
The research question addressed was: Can higher relationship value lead towards business expansion in the South African automotive supply chains between first-tier and second-tier suppliers? The findings of the study reported on in this article confirm that there is a strong correlation between relationship value and business expansion in the South African automotive supply chain between first- and second-tier suppliers. The assumption is thus that if second-tier suppliers increase relationship value, business opportunities will expand accordingly. Notwithstanding the different cultures of origin, there was a strong indication that different cultures from different companies all seem to understand the importance of relationship value.
Automotive component suppliers are advised to take cognisance of the fact that in order to survive and thrive in the global automotive arena, South African automotive component suppliers might consider the introduction of a strategy specifically to increase relationship value towards their customers which might harvest positive outcomes. This relational value strategy might include planning, flexibility and monitoring of long-term supply chain activities. This is in line with the approach suggested by Yeh (2016:149) that a relationship governance strategy should be introduced. The relational governance strategy aims to plan, adjust and monitor relationship value between parties to achieve the desired outcomes for both parties, including business expansion.
It is believed that the study reported on in this article makes a valuable contribution towards an improved understanding of how to shape supplier relationships in the South African automotive supply chains, in order to make these supply chains more sustainable in the long run. The conceptualisation was presented of how supply chain management encapsulates supply chain collaboration that includes relationship value. This relationship value promises to ultimately result in business expansion.
The study only examined the experience that Tier 1 suppliers derive from their Tier 2 suppliers through relationship value, and further research between other stakeholders within supply chains in different countries is invited.
In conclusion, the research strongly suggests that relationship value may contribute towards the survival of automotive component suppliers through business expansion. Relationship value might enhance the supply chain stakeholders’ ability to generate more business, which is in line with the South African government’s vision to double the industry output by 2020. Hence, with increased relationship value resulting in business expansion, supply chain role players can maintain relationships because they want to and not because they have to.
Acknowledgements
This article is based on the doctoral thesis of A.S.T. (University of South Africa). A.S.T. was therefore the only contributor to this article in terms of conceptualisation, literature research and presentation. However, credit must be given to Prof. J. Badenhorst-Weiss who provided valuable inputs in terms of the finalisation of the article. Two consultants, Dr Dion van Zyl and Dr Marthi Pohl, assisted with additional statistical data analysis and interpretation.
Competing interests
The author declares that she has no financial or personal relationships that may have inappropriately influenced her in writing this article.
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