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
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,
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.
2. BARGAINING POWER AND TASK INTERDEPENDENCE
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
[FIGURE 1 OMITTED]
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
3. VENDOR SELECTION PRACTICE
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.
4. BUSINESS PERFORMANCE
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. THEORY AND PROPOSITIONS
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
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