The impacts of bargaining power and vendor selection practices on performance in supply chain.
Semiconductor industry (Management)
Vendor relations (Analysis)
Logistics (Analysis)
Pai, Fan-Yun
Huang, Kai-I
Yeh, Tsu-Ming
Pub Date:
Name: European Journal of Management Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2008 International Academy of Business and Economics ISSN: 1555-4015
Date: Winter, 2008 Source Volume: 8 Source Issue: 4
Event Code: 200 Management dynamics Computer Subject: Semiconductor industry; Vendor relations; Company business management
SIC Code: 3674 Semiconductors and related devices
Geographic Code: 4E Europe

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Over the last 50 years, the semiconductor industry has served as a primary enabler of the high-tech revolution. The technology level and capacity are the major sources of bargaining power of firms in semiconductor industry. The characteristics of short product lifecycle and technology complexity pressure companies to choose a capable and trustful partner for a focal buyer firms. They need to give complicated consideration to select downstream vendors under different bargaining power structures. This paper aims to explore how the bargaining power of focal buyers influences their vendor selection practices. We contend that relative stronger and weaker focal firms will put different importance on vender selection criteria when they face difference task independence types between them and their vendors. Finally, we propose a proposition about the relationships between vendor selection practices and focal firms' overall performance.

Keywords: bargaining power, vendor selection, semiconductor supply chain


Over the last 50 years, the semiconductor industry has served as a primary enabler of the high-tech revolution. As technology complexities continue to increase, the interdependence between IC designer and IC manufacturer also increases and the ties among supply chain members are enhanced. Not surprisingly, for example, IC manufacturing vendors (foundries) can not develop advanced process technology without collaborating with an IC design houses (fabless) that have market knowledge. On the other hand, IC designers, also sedulously try to form and maintain partnership with their vendors to endure IC provision while foundries try to lock-in fabless to obtain their long-term commitments.

Research suggests that collaborative supply chain management helps chain members create 'a rising tide that lifts all boats. However, resource dependence theory suggests that when tides rise, some boats are lifted more than others. Members who furnish important resources or resources where control is concentrated have bargaining power (Crook and Combs, 2007). In semiconductor industry, short product lifecycle time and substantial technology complexity make firms with advance technology or knowledge or large volume scale have stronger bargaining power than those in other industries (Kim et al., 1999). This creates an opportunity for the more powerful company to behave opportunistically in terms of distorting information or reneging on commitment (Gerwin, 2006).

Another issue in the semiconductor industry concerns weak property right (Gerwin, 2006). Property right is regarded as the source of competence of firms. However, cooperation facilitates the unintentional transfer of tacit information and increase the risk of intelligent property (IP) leakage. Although both stronger and weaker firms put a lot of effort on IP protection, stronger firms can appropriate their power to retaliate weaker firm's leakage. However, weaker firm has less power to do so. Therefore, under the supply chain with bargaining power asymmetry and technology complexity, to choose a trustful partner is particularly important for a focal buyer firms. This paper is thus to explore how the bargaining powers of focal firms and their alternative vendors influence the vendor selection practice. We wonder that whether relative stronger focal firm will put the same importance on vender selection criteria under difference bargaining power structures. Also, we propose proposition for the relationship between vendor selection practice and focal firms' overall performance. The conceptual model is demonstrated in Figure 1.


Power has been defined in various ways but all definitions essentially contain the idea of the control, influence or direction of one party's behavior by another (Brown et al., 1995; Dapiran and Hogarth-Scott, 2003 Hingley, 2005; Crook, et al., 2007). Firms seek to improve terms and conditions of exchange through bargaining (Hicks, 1932). Bargaining power enables stronger firms to gain favorable exchange terms from others to coerce others to do what they would otherwise not do (Pfeffer, 1981). Although some researches suggest that competition has changed from one firm competing with another to one supply chain competing with another, stronger members still might calculate others' dependencies and exert their power during negotiations.


The use of power is refrained from the need for the party's coordination because it increases conflict, reduces satisfaction, and ultimately, decreases some firms' willingness to participate (Frazier and Summers, 1986). When a firm needs the other firm's cooperation, it will be inclined not to use power or use power much more carefully. In a supply chain, coordination has long been considered a key determinant of task accomplishment in organization theory (Barnard, 1938). It is a mechanism to align actions of supply chain members performing different parts of a task. The type of coordination required depends on the type of task interdependence faced by actors performing the task (Thompson, 1967). He described three types of task interdependence--pooled, sequential, and reciprocal--and linked these three with three types of coordination--standardization, planning and scheduling, and mutual adjustment.

Pooled interdependent tasks are those where ''each part renders a discrete contribution to the whole and is supported by the whole''. This might occur in a retail supply chain where separate suppliers do not need to coordinate. Sequentially interdependent tasks occur in, for example, manufacturing supply chains where one member's task must be completed so another's can begin; coordination requires plans and schedules (Thompson, 1967). Finally, in reciprocally interdependent tasks, actors' tasks are related to, and dependent on, each other (e.g., joint project development). Since we focus on semiconductor manufacturing and related industry, pooled interdependent tasks are not included in this paper.

We contend that as task interdependence moves from sequential to reciprocal, and coordination demands increase, stronger firms are more likely to forbear in their use of bargaining power because exercising bargaining power generates weaker actors' resentment and reduces weaker actors' willingness to cooperate (Gaski, 19840). Weaker actors' cooperation and support are quite important under reciprocally interdependence and their retaliation is often considered as being too high (Ramsay, 1996). On the contrary, when two firms are simply sequential task interdependent, the coordination demands on the other firm is low so the stronger firm is much more likely to explore their bargaining power than it will do when two firms are reciprocally interdependent.


A fundamental decision that is required by supply chain managers is the selection of vendors, i.e. scouting, evaluation and identification of the best-suited vendors among many others (Ellram, 1990). There is a wide agreement on the main categories of vendor selection criteria. Interviews on practitioners and insights from the literature suggest that two forms of assessments to select right supplier are deemed necessary antecedents to successful supplier integration (Ellram and Hendrick, 1995; Gulati et al., 2005). The first category corresponds to vendors' principal manufacturing performance and competitive priorities: cost, quality, delivery and flexibility. Besides, several researchers proposed additional factors such as service, innovativeness (Ellram, 1990) and dependability (Fynes and Voss, 2002). However, these additional factors are regarded as part of the four principle manufacturing performance. These criteria represent vendors' capability in terms of production and technology, thus to select vendors under the consideration of the above criteria is defined as capability-based selection practice in this paper.

The other category focuses on maintaining or establishing long-term relationship between buyers and vendors. The common criteria include information sharing, trust, communication openness and reputation for integrity to identify whether suppliers are benevolent and whether trust exists between the two partners (Choi and Hartley, 1996). Choosing a benevolent and trustful supplier is a typical way to protect IP or confidential knowledge from leakage for the focal buying firm. To select vendors by considering the relational criteria is defined as relationship-based selection practice herein.


Since semiconductor industry is a capital-intensive and hyper-competitive industry, both financial and market share are considered as indicator of overall firm performance. Return on investment, return on assets and return on sales are defined as financial indicators, while market share and growth in market share are defined as market share indicators (Dorge et al., 2004). These indicators were used in several supply chain literatures to measure buying firms' performance (Katiskeas et al., 2004; Tracey and Tan, 2001). In addition to objective indicators, we use an affective measure to measure the relationship success. The objective indicators grows form the belief that the relationship between buyers and vendors are formed to achieve a set of goals (e.g. to enhance a company's competitive position). The attainment of such goals can improve financial or market share performance. The affective indicator (satisfaction) is based on the notion that objective indicators are determined.


5.1 Partner Selection under Sequential Interdependence

In sequentially interdependent tasks, where one firm's outputs become another's inputs, there is an increased need for coordination (Crook and Combs, 2007). In semiconductor manufacturing supply chain, there are some sequentially interdependent tasks between focal firms and vendors. For example, the manufacturing activities between Fabless, which outsources mature-process ICs manufacturing, and their vendors belongs to this type of interdependence. As long as stronger firms do not exercise bargaining power to the point where participation in SCM lowers weaker members' individual profits, the level of conflict generated will not interfere with the plans and schedules needed to coordinate sequentially interdependent tasks (Kumar et al., 1995). Although stronger firms are likely to appropriate their bargaining power, weaker focal firms still have incentive to cooperate because they benefit from increased volume and greater input/output stability. Since buyer's exercising power is sufferable for vendors, stronger focal firms will select much more capable vendors to enhance or retain their product quality. As to weaker focal firms, they will select much more trustable vendors to avoid or decrease the risk of IP leakage to protect themselves. They have less capability to retaliate vendors' opportunistically behaviors (Dapiran and Hogarth-Scott, 2003; Duffy and Fearne, 2004). Based on the preceding discussion, the following propositions are proposed:

Proposition 1: When task interdependence among focal firms and their vendors are sequential, stronger focal firms will put more importance on capability-based selection practice than weaker firms do.

Proposition 1b: When task interdependence among focal firms and vendors are sequential, weaker focal firms will put more importance on relationship-based selection than stronger firms do.

5.2 Partner Selection under Reciprocal Interdependence

Reciprocally interdependent tasks are those where each chain member sends outputs to and receives inputs from others (Crook and Combs, 2007). This type of interdependence occurs the design and manufacture advance-process ICs in semiconductor industry. When a fabless develops an IC adopting advance-process technology (below 90 nm), it needs to communicate and work with a foundry to work out manufacturable design rules. They need to work together to shoot design and manufacturing problems and to enhance yield for cost reduction in both sides.

Because each part of a task is simultaneously dependent on how others are performed, coordination must be accomplished by mutual adjustment wherein members constantly react to each other. Mutual adjustment requires active cooperation and intense communication. Therefore, conflict that undermines effective mutual adjustment will eliminate the whole supplier chain gains. Mutual adjustment requires minimum conflict (Kumar et al., 1995). It is expected that stronger or weaker members forbear the use of bargaining power to lower conflicts because they both have much to lose. Therefore, No matter focal firms are stronger or weaker, they will not worried about the vendors' appropriating their bargaining power. Focal firm will consider capability-based criteria and relationship-based criteria simultaneously under considering the intelligent property protection and complementary-capability gathering. Based on the preceding discussion, we proposed the following propositions:

Proposition 2: When task interdependence among focal firms and vendors are reciprocal, both stronger and weaker firms will consider capability-based and relationship-based criteria simultaneously when adopting vendor selection strategies.

5.3 Vendor Selection Practice and Focal Firm Performance

Previous research has suggested that the choice of a particular vendor in an important variable influencing supply chain performance (Vachon and Klassen, 2007). Regardless of the specific criteria of interest, the fundamental objective of supplier chain partnership is to achieve alignment between the buying company's needs and the supplier's capabilities, both from a technical standpoint of and a behavioral standpoint. Kuei et al. (2001) reported that supplier selection separates "good performing" firms from "not-so-good performing" organizations. High performing organization takes proper supplier strategies. Therefore, identifying proper criteria and supplier evaluation practices is positively related to the performances of firms. As a result, we propose:

Proposition 3: High performing firms adopt different vendor selection practice from low performers do under the same bargaining power structure in the same task interdependence environment.


Bargaining power structure between a focal firm and their vendors will influence the criteria a focal firm adopts to select the proper vendors. In the semiconductor supply chain, the technology complexity makes capability for short production time and high quality and goodwill for IP protection and cooperation of a vendor as the two major vendor selection criteria. To safeguard themselves, relative stronger and relative weaker focal firms will adopt different vendor selection practices from capability-based and/or relationship-based perspectives. Several propositions are proposed in this study. These help to explore the impacts of bargaining power and task interdependence on the importance of supplier selection criteria and their impacts on focal firms, buyers, performance in the semiconductor industry.


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Fan-Yun Pai, National Kaohsiung First University of Science and Technology, Taiwan

Kai-I Huang, Tunghai University, Taiwan

Tsu-Ming Yeh, Dayeh University, Taiwan


Dr. Fan-Yun Pai earned her Ph.D. at National Taiwan University in 2008. Currently she is an assistant professor at National Kaohsiung First University of Science and Technology. Her research interests include supply chain management and service innovation and management.

Prof. Kai-I Huang earned his Ph.D. at Texas A&M University, College Station, Texas, U.S.A. in 1991. He is currently the Dean of College of Management, Tunghai University, Taiwan.

Dr. Tsu-Ming Yeh earned his Ph.D. at Chung-Yuan Christian University, Taiwan in 2006. Currently he is an assistant professor of Department of Industrial Engineering and Technology Management, Da-Yeh University, Taiwan.
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