A company's internal organization may be the key to increasing quality in the supply chain, according to new research co-written by a University of Illinois Urbana-Champaign business scholar who studies supply chains.
When it comes to improving supply chain quality, most companies look outward by tightening contracts, pressuring suppliers or switching vendors. But a new study suggests that the key to better quality may start by looking inward by revamping the buyer's own organizational design, which can ultimately cut supplier defects by up to 74%, says Ujjal Kumar Mukherjee, a professor of business administration at Illinois.
"Redesigning a buyer's internal incentives and structure can drive dramatic improvements in supplier performance, indicating that improving supply chain quality starts at home," he said. "This study shows that quality is not just something you demand from your suppliers. It's something you can enable through your own design choices. Incentives and structure inside the buying organization send powerful signals that shape how suppliers respond."
Mukherjee's co-author is Anupam Agrawal of Texas A&M's Mays Business School.
The study examined how a buyer's internal organizational choices affected supplier quality by analyzing a rare quasi-experiment at a major automotive manufacturer.
The results were dramatic: Suppliers working with the plant that implemented the supplier improvement unit reduced defect rates by an estimated 74% over suppliers serving the traditional plant.
The researchers compared two automotive plants. One introduced a new "Supplier Improvement Unit" that was dedicated solely to supplier quality improvement.
"The supplier improvement unit gave engineers more autonomy, a flatter reporting structure and long-term evaluation metrics focused on reducing defects," Mukherjee said.
A second plant within the same company, which relied on many of the same suppliers, maintained its traditional structure and a short-term production focus.
"The creation of the supplier improvement unit was essentially an internal organizational redesign," Mukherjee said. "It separated long-term quality improvement from the day-to-day troubleshooting of production, and it gave engineers both the incentive and the structural support to collaborate with suppliers."
The results were dramatic: Suppliers working with the plant that implemented the supplier improvement unit reduced defect rates by an estimated 74% over suppliers serving the traditional plant.
"Instead of repeatedly addressing the same issues, engineers and suppliers engaged in root-cause analysis and systemic fixes, thus building lasting knowledge about how to improve product quality," Mukherjee said.
The researchers found that these improvements stemmed not from new contracts or financial incentives, but from role-based incentives and a more organic organizational structure. For example, engineers were freed from daily production pressures and evaluated on year-over-year supplier improvements, Mukherjee said.
"Those engineers reported directly to the plant manager, meaning it was a flatter organization structure, which allowed them to secure resources quicker and coordinate across departments more effectively," he said.
The study also examined whether quality knowledge created through the supplier improvement unit spilled over to other buyers or even to the automaker's other plant. Surprisingly, the researchers found that knowledge did not easily transfer.
Spillovers occurred only in cases where suppliers produced similar products, used common processes or operated in the same location, Mukherjee said.
"This is encouraging for managers who worry that their investments in supplier development will benefit competitors," he said. "Our findings suggest that while some spillovers do occur, the benefits are largely retained by the buyer who initiates the organizational change."
For companies navigating today's complex web of supply chains, the findings have important implications.
"Our study provides evidence that companies have more control than they think," Mukherjee said. "By looking inward at how they structure and incentivize their people, they can directly influence supplier outcomes."
The paper was published by the Journal of Operations Management.
