Supplier price concessions: A longitudinal empirical study

Transcription

1 Market Lett (2009) 20:61 74 DOI /s Supplier price concessions: A longitudinal empirical study John W. Henke Jr. & Sengun Yeniyurt & Chun Zhang Published online: 15 May 2008 # Springer Science + Business Media, LLC 2008 Abstract The competitive nature of today s business-to-business markets requires companies to continually look for ways to reduce costs; one of the easiest of which is to demand price reductions from suppliers. In this research, price reduction demands and the corresponding concessions given by 238 suppliers to the six major North American Automotive original equipment manufacturers during are analyzed utilizing a simultaneous equation model. The three stage least squares estimates indicate that suppliers are willing to give higher price concessions when buyers align specific interfacing characteristics and processes with their suppliers so that the suppliers perceive greater opportunities for future business and profit. These results provide, for the first time, an understanding of the dynamic nature of the impact of buyer supplier relational components on supplier price concessions. Keywords Buyer supplier relations. Buyer price reduction pressure. Supplier price concessions. Supplier product development involvement Today, more than ever, the competitive nature of business-to-business markets demand that companies in these markets continuously look for ways to reduce their The authors are grateful for the partial funding received for this research from the MIT International Motor Vehicle Program. J. W. Henke Jr. School of Business Administration, Oakland University, Rochester, MI 48309, USA S. Yeniyurt School of Business, Rutgers University, Piscataway, NJ 08854, USA C. Zhang School of Business Administration, University of Vermont, Burlington, VT 05405, USA J. W. Henke Jr. (*) 1035 South Adams Road, Birmingham, MI 48009, USA henke@ppi1.com

2 62 Market Lett (2009) 20:61 74 costs. One means by which companies achieve lower costs quickly and relatively painlessly is to pressure their suppliers for lower prices. This approach to achieving lower costs has been used for decades and continues today in numerous industries including automotive (Sherefkin 2006), retailing (Maremont and Berner 1999), and electronics (Carbone 2005). On the other hand, more insightful and strategicallyoriented buyers and suppliers have taken a collaborative approach to achieving lower supplier prices (Williamson 1996; Jap 1999; Cannon and Homburg 2001). While there is a growing understanding of the conditions that impact cost reductions and profit sharing in buyer supplier transactions (Noordewier et al. 1990; Srivastava et al. 2000; Cannon and Homburg 2001; Ghosh and John 2005; Mantrala et al. 2005), little is known about how suppliers respond to price reductions asked of them by buyers under different relational conditions. To add to this dimension of the literature, this research conducts an empirical test of the determinants of supplier price concessions given in response to buyer price reductions asked using 1,659 buying situations over a 7 year period in the North American automotive industry. 1 Buyer price reductions The nature of the working relations a buyer has with its suppliers impacts the manner by which the buyer may attempt to lower the price of the production goods it purchases. As a result, it is common for different companies within the same industry to have different approaches to achieving price reductions for their purchased goods. This is certainly the case in the automotive industry (Webster 2006). For example, in the early 1990 s J. Ignacio Lopez de Arriortua, Vice President of Purchasing for General Motors, unilaterally tore up contracts, demanded lower prices, and threatened suppliers who didn t meet his demands with contract cancellations. Lopez subsequently reduced GM s cost of goods by billions of dollars, virtually overnight (Economist 1998). Ford has followed the same approach since the mid-90s, albeit with less draconian pressures (Shirouza 2003). Even Chrysler, after almost a decade of building trusting supplier relations, unilaterally announced that supplier invoices would be reduced 10% in January 2001 (Miller 2000). In contrast, the foreign domestic original equipment manufacturers (OEMs), particularly Honda and Toyota, work with their suppliers in a collaborative manner to achieve price reductions (Laseter 1998; Nelson et al. 1998; Liker 2004). The collaborative approach has been used in various industries where buyers and suppliers have achieved lower costs by working together to reduce the costs of internal activities in their respective firms, as well as by reducing the costs associated with various interfacing activities of their day-to-day working relations (Noordewier et al. 1990; Kalwani and Narayandas 1995). While collaborative activities by buyers and suppliers to achieve mutually beneficial strategic outcomes can result in lower costs (Jap 1999), achieving this end is complex. The interfirm relationship management literature has discussed a variety of characteristics that facilitate a buyer s cost reduction efforts. Dependence and relational norms have been found to jointly determine the degree of cost reductions in B2B purchasing arrangements (Noordewier et al. 1990; Cannon and Homburg 2001). Working closely together, while maintaining parallel sourcing with a credible

3 Market Lett (2009) 20: threat to switch suppliers, has been found to be the basis for successful relations, including lower costs (Richardson 1993). On the other hand, strategically-oriented buyers and suppliers oftentimes work together to create the maximum value from their transaction, regardless of the relative power and dependence of the parties (Williamson 1996). In addition, the manner by which buyers and suppliers align resources, specific investments, and governance structures impacts cost reduction outcomes (Ghosh and John 2005). While the researchers cited above have contributed substantially to understanding the conditions that impact cost reductions in buyer supplier transactions, the nature of their research precluded addressing the reaction of suppliers to specific buyer price reduction expectations and the associated relational conditions of the buyer supplier relations. Considering that the cost of the parts comprising the end product is a significant portion of the price of manufactured goods, it is worthwhile to investigate how relational factors impact supplier price concessions. In this study, we empirically test the simultaneous influence of some key relational variables discussed in the literature on supplier price concessions in the North American automotive industry. There is a range of buyer supplier relations among the six major original equipment manufacturers: Chrysler, Ford, General Motors, Honda, Nissan, and Toyota, who use different approaches to obtain annual price concessions from their suppliers (Cleveland 2004). In the automotive industry, a significant portion, 65% to 75%, of the price of the vehicle is attributed to the price of purchased parts. Furthermore, price negotiations are an industry standard that occurs regularly. These characteristics make the automotive industry an appropriate industry in which to study how suppliers adjust their pricing in response to relational conditions. A simultaneous equation model is developed to explain the role of relational variables in supplier price concession decisions. The model is then estimated using three stage least squares (3SLS). The results are presented together with a discussion of their contribution to the extant literature. The implications of the findings are also discussed. The paper concludes with a discussion on the limitations of the current research and directions for future research. 2 Dataset The dataset was acquired from a leading automotive industry marketing research company that conducts an annual survey of Tier 1 production suppliers to the six major North American automotive OEMs (Chrysler, Ford, General Motors, Honda, Nissan, and Toyota) to determine the OEM supplier working relations. Sales personnel at the Tier 1 suppliers who have commercial responsibility for their firm s OEM customers are the key informants in the survey. This approach is consistent with the general recommendation to use informants who are most qualified to report on the issues under investigation (Kumar et al. 1993). Time series panel data were derived for the years of While numerous reasons have been discussed concerning the difficulty of implementing longitudinal field-survey research (Anderson 1995), time series panel data offers several benefits, including increased heterogeneity of observations, which alleviates multicollinearity

4 64 Market Lett (2009) 20:61 74 concerns and provides the ability to study dynamic phenomena (Wooldridge 2002). The data set contains observations from 238 North American Tier 1 suppliers. After lagging some of the variables by 1 year and dropping the observations that have missing information in any of the variables, a total of 1,659 usable year-supplier OEM observations remained to constitute the time series panel database. 3 Model and its variables A review of the existing literature on buyer supplier relationship management and price negotiations, coupled with 34 interviews with Tier 1 supplier sales personnel, including Vice Presidents of Sales, Account Managers, and sales representatives, identified several economic and relational factors that may affect a supplier s price concession given to an OEM. The economic conditions identified are: (1) the price reduction asked of the supplier by the buyer, which is captured as the total price reduction percent asked of the supplier by the OEM in a given year, and (2) the dependent variable, the supplier price concession, which is captured as the percentage price concession given by the supplier to the OEM in a given year. The six relational conditions are: the supplier s perception of the opportunity to make an acceptable return over the long-term on the buyer s business, buyer pressure on the supplier to reduce prices, supplier involvement in the buyer s product development process, buyer help provided to the supplier to reduce costs, supplier trust of the buyer, and supplier sales dependence on the buyer. The relational data were captured using five point Likert scales for every year-supplier-oem combination. 3.1 OEM price reduction asked In buyer supplier negotiations the reference points that are determined before the negotiations begin influence the outcome of the negotiations (Krause et al. 2006). Of these reference points, the opening offer is considered to be the most relevant. In our situation the OEM initial price reduction demand would be a relevant reference point. As one V.P. of Sales commented, The higher the price reduction the OEM asks of us, the more we work to minimize what we give them. It would, therefore, be expected that the price reduction asked by the buyer would be an essential element of the model. 3.2 Supplier making an acceptable return Price negotiations are typically perceived to result in a winner and a loser. If, however, the buyer and supplier are working together in a collaborative pie expansion manner that will result in mutually beneficial strategic outcomes (Jap 1999), the negotiation may approach a win win situation. In other words, when a supplier perceives that there are opportunities to make an acceptable return over the long-term on the buyer s business, it is more willing to view price negotiations as a win win situation. Therefore, the supplier s anticipation of making an acceptable long-term return on the OEM s business is included in the model.

5 Market Lett (2009) 20: OEM pressure to reduce prices The buyer can impact the supplier s response to its price reduction expectations by the pressure it applies on the supplier. The pressure can range from adversarial threats to shifting business to another supplier if its expectations are not met, to the more collaborative approach of buyer personnel reminding the supplier of the importance of its price concession to the financial wherewithal of the buyer. Regardless of how the buyer pressure may be manifest, the pressure can influence how the supplier responds. It is, therefore, reasonable to expect OEM pressure on suppliers to reduce their price would have a positive impact on the price concession given. 3.4 Supplier product development involvement It is reasonable to expect that suppliers who are involved in their customer s product development process will realize cooperative gain, as it is a situation that favors joint resource coordination. An OEM Account Director for a supplier mentioned that Being involved early in (OEM name) s product development process... enables us to influence the design to our mutual advantage and also learn about other vehicle programs, increasing the probability of gaining some business. The supplier product development involvement doesn t assure the supplier future business, but it creates a situation where the supplier perceives it can positively influence potential future business. Certainly, this influence is greater than any influence the supplier may have when not involved in the buyer s product development program. Additionally, early product development involvement provides the supplier opportunity to suggest design changes that may be used to generate buyer cost savings. Therefore, supplier involvement in the OEM product development process is taken into consideration in model specification. 3.5 OEM help to reduce costs Buyer assistance is considered a key aspect of relational norms in B2B markets (Noordewier et al. 1990). Interviews with supplier personnel revealed that the automotive OEMs provide assistance to their suppliers in cutting costs and generating price concessions, although they differ significantly in the extent of their support. For example, one OEM sends its engineers to supplier manufacturing facilities to help the supplier find cost saving opportunities that will translate into lower prices. Another OEM takes the same approach with its suppliers, while also arranging groups of non-competing suppliers to collaboratively find ways to cut costs in their manufacturing processes (Liker 2004; Liker and Choi 2004). This suggests that the OEM help provided to the supplier to reduce costs would positively impact the supplier price concession. 3.6 Supplier trust of OEM Complementing these circumstances is the trust between transactional parties which can generate supernormal economic outcomes (Dyer and Singh 1998) and enhance cooperation among channel partners (Rindfleisch 2000). In addition, suppliers in a

6 66 Market Lett (2009) 20:61 74 trusting environment are able to offset price reductions with inventory cost decreases (Kalwani and Narayandas 1995), thereby realizing a net gain over those suppliers who are in a less trusting environment. The implication of these findings is that suppliers benefit economically from being in a trusting relationship. Subsequently, supplier trust of the OEM is taken into consideration in the model development. 3.7 OEM share of supplier s sales Sales dependence is considered to significantly affect cost reductions and buyer supplier relationship management outcomes (Anderson and Narus 1990; Noordewier et al. 1990; Ganesan 1994). If the supplier s products are not important to the buyer and they contribute little to the buyer achieving a cost or differential advantage, the supplier is in a weak position (Cool and Henderson 1998). Similarly, if the buyer is a major customer, i.e., the buyer s purchases represent a large proportion of the supplier s sales, and the supplier cannot easily replace the buyer, the supplier is in a weak position (Kalwani and Narayandas 1995). It would, therefore, be expected that the importance of the OEM purchases to the supplier would positively impact the price concession given by the supplier. In the dataset the importance of the OEM business is measured as the OEM share of the supplier s sales, i.e., the percent the supplier s sales to the OEM is of the supplier s total annual automotive sales revenues in a given year. 3.8 Other variables Other variables employed in the empirical model include the size of the supplier (i.e., annual total automotive revenue), and dummy variables representing the OEMs, survey years, and product categories (powertrain, chassis, exterior, interior, electrical and electronics, and body-in-white). The descriptive statistics of the variables employed are described in Table Model The price concession given to the OEM is modeled as a multiplicative function of independent variables (e.g., Elberse and Eliashberg 2003; Hennig-Thurau et al. 2006). The multiplicative functional specification is based on the premise that if the price reduction asked is zero, the price concession given will also be zero, regardless of the relational conditions. The relational variables interact with the OEM price reduction asked to determine the supplier price concession given. An additional benefit of this type of model specification is that the coefficients represent the elasticity of the price reduction to changes in each independent variable. The resulting equation is: PCgiven ijt ¼ e b 0 PRasked b 1 ijt X b 2 ijt Y b 3 ijðt 1Þ e b 4Z ijt e e ijt ð1þ Where PCgiven ijt denotes the price concession percentage given by supplier i to OEM j in year t. PRasked ijt stands for the price reduction percentage asked by OEM j from supplier i in year t. X consists of the continuous exogenous variables (i.e.,

7 Market Lett (2009) 20: Table 1 Descriptive statistics Variable Mean Standard Deviation Supplier price concession given (%) OEM price reduction asked (%) Supplier making acceptable return OEM pressure to reduce prices Supplier product development involvement OEM help to suppliers to reduce costs Supplier trust of OEM OEM share of supplier s sales (%) Supplier total automotive revenues (in U.S. dollars) Supplier sales to OEM (in U.S. dollars) Powertrain product category Chassis product category Exterior product category Interior product category Electrical and Electronics product category (year) (year) (year) (year) (year) OEM # OEM # OEM # OEM # OEM # Base cases are: Body-in-white product category, 2002 (year), and OEM #1. OEM names are not included to protect OEM confidentiality supplier making acceptable return, OEM pressure to reduce prices, supplier product development involvement, OEM help to suppliers to reduce costs, and supplier trust of OEM, all captured in year t), while Y consists of OEM share of supplier s sales for supplier i and the supplier size (supplier total automotive revenues) variables, captured in year t 1. The OEM share of supplier s sales,aswellassuppliersize,hasbeen lagged by 1 year, because at the time of the price negotiations the responding supplier would not have known the sales figures of the year and it would be expected that the supplier decision maker would use the previous year s sales figures as a proxy in determining the extent of dependency on the OEM, as well as the overall sales situation of the company. Z includes the five product categories and 5 year dummies, with e as the error term. After a logarithmic transformation the equation becomes linear additive and can be estimated using time-series panel estimation methods. To account for the endogeneity of price reduction asked by the OEM of the supplier on the expectation of the price concession to be given, a second equation is created that takes into consideration this effect. PRasked ijt ¼ e a 0 PCgiven a 1 ijðt 1Þ U a 2 ijðt 1Þ ea 3V ijt e δ ijt ð2þ With this second equation, the price reduction asked by OEM j from supplier i in year t is set as the multiplicative function of the price concession received from supplier i in the previous time period (PCgiven ij(t 1) ) and the total sales, in U.S.

8 68 Market Lett (2009) 20:61 74 dollars, that was purchased from supplier i in the previous year (U ij(t 1) ). It is expected that higher price concessions received in previous years will create an expectation for similar concessions in the purchase situations of the current year. Similarly, higher total dollar values of purchases in the previous year are expected to strengthen the negotiating position of the OEM and engender a greater price reduction request. V ijt denotes a set of five dummies included in the equation to account for the significant differences that are expected to exist among the OEMs in their negotiation approaches. A set of five dummies is utilized to represent the six OEMs represented in the dataset. 1 Price reductions asked are expected to differ significantly across different product types as suppliers may have differing levels of cost reduction flexibilities for different products. Therefore, the set of five dummies representing the product categories, with body-in-white as the base case is included in V ijt. Also, to account for changes in general economic conditions such as raw material prices increases and global supply and demand, a set of year dummies is included in the covariates. While α s are the associated coefficients, δ is the error term. The multiplicative equations have to be linearized to be estimated using conventional methods. With this purpose, the logarithmic transformation has been applied to both equations. The system can be simultaneously estimated using 3SLS. An ordinary least squares method does not suit our purposes because the presence of lagged endogenous variables makes it a biased estimator (Kennedy 2003: 197). 3SLS is also more efficient than two stage least squares when the disturbance terms across equations are potentially correlated (Kennedy 2003: ). The 3SLS estimates of the equation parameters can be seen in Table 2. 4 Results The results indicate that the model has an adequate overall fit to the data, with an R 2 statistic of 0.22 and a statistically significant c 2 statistic of (p<0.001) for the first equation and an R 2 statistic of 0.19 and a c 2 statistic of (p<0.001) for the second equation. Multicollinearity concerns have been addressed using the variance inflation factor. 2 The variance inflation factors of the price concession given equation range between 1.12 and 2.20, and for price reduction asked equation between 1.08 and 2.43, which are within acceptable levels (Neter et al. 1996). The estimates of the first equation indicate that several factors have a significant impact on the price concession given by the supplier to the OEM. The price reduction asked by the OEM has a significant positive effect on the price concession given by the supplier (b =0.853, p value<0.001). Supplier s belief that the long-term return from its business with the OEM will be acceptable has a statistically significant positive effect (b =0.121, p value=0.003). OEM pressure on the supplier to reduce its price, also, has a significant positive effect on the price concession outcome (b =0.205, p value=0.018), as does the extent of supplier involvement in the OEM product development process (b =0.112, p value=0.004). On the other 1 Dummy variables are disguised to protect the confidentiality of the OEMs. 2 Ordinary least squares method was employed to estimate this statistic.

9 Market Lett (2009) 20: Table 2 Three stage least squares estimates Coefficient Standard Error z p value Price concession given equation (R 2 =0.22; c 2 =436.64, p<0.001) OEM price reduction asked <0.001 Supplier making acceptable return OEM pressure to reduce prices Supplier product development involvement OEM help to suppliers to reduce costs Supplier trust of OEM OEM share of supplier sales (t-1) Supplier total automotive revenues (t 1) Powertrain product category Chassis product category Exterior product category Interior product category Electrical and Electronics product category (year) (year) (year) (year) (year) Constant <0.001 Price reduction asked equation (R 2 =0.19; c 2 =451.22, p<0.001) Supplier price concession given (t-1) <0.001 Supplier sales to OEM (t-1) OEM # <0.001 OEM # <0.001 OEM # <0.001 OEM # <0.001 OEM # Powertrain product category Chassis product category Exterior product category Interior product category Electrical and Electronics product category (year) (year) (year) (year) (year) Constant <0.001 hand, both OEM help to reduce costs (b=0.061, p value=0.081) and share of sales (b =0.036, p value=0.083) has a marginally significant positive effect on price concession given. Supplier trust of the OEM has a statistically insignificant effect on price concession given (b =0.037, p value=0.421). The results also indicate that the size of the supplier, measured in terms of total annual automotive revenues in U.S. dollars, has a positive and statistically insignificant effect on price concessions (b =0.008, p value=0.325). The effects of the product group dummy variables indicate that powertrain (b = 0.108, p value=0.010) and chassis (b = 0.114, p value=0.007) have lower price concession levels than body-in-white, while interior (b =0.085, p value=0.092) and electrical and electronics (b =0.134, p value=0.030)

10 70 Market Lett (2009) 20:61 74 have significantly higher price concessions. Exterior has an insignificant positive effect on price concessions given to the OEM (b =0.047, p value=0.345). Among year dummies, 2006 has a significant negative effect on price reduction given (b = 0.271, p value=0.012). The remaining year dummies have negative insignificant effects on price concessions given. The estimates of the second equation indicate that the price concession received by the OEM in the previous year has a significant positive effect on the price reduction asked of the supplier in the current year (a =0.198, p value<0.001). Similarly, the total purchases of the OEM from the supplier in the previous year has a positive and significant effect on the price reduction asked by the OEM (a=0.018, p value=0.001). The effects associated with the OEM dummy variables indicate that when compared to the base OEM, all others have significantly higher price reductions asked, indicating considerable variation among the OEMs. Among the OEMs, there is considerable variation in the price reduction asked, ranging from OEM #2 with the highest price reductions asked (a=0.501, p value<0.001), to OEM #6 with the lowest price reductions asked (a =0.069, p value=0.090). The effects of product category dummies reveal that when compared to body-in-white, electrical and electronics (a =0.108, p value=0.014) and exterior (a =0.088, p value=0.014) related products tend to have significantly higher price reductions asked by the OEMs of their suppliers. The effects of the other product category dummies are statistically insignificant. Finally, when compared to 2002, the OEMs asked significantly higher price reductions in 2004 (a=0.189, p value=0.020), 2005 (a=0.176, p value=0.028) and 2006 (a =0.142, p value=0.076). 5 Alternate approach: generalized least squares estimation of random effects As an alternative, the effects of the variables of interest on the price concession given by the supplier to the OEM were estimated using the generalized least squares method for random effects (Wooldridge 2002), which is frequently used for crosssectional time series panel data models (e.g., Aaker and Jacobson 1994; Dewan and Kraemer 2000; Prabhu et al. 2005). The lagged values of price concession given were included in this specification to control for dyad specific factors which affect price concessions across time periods, but are not explicitly accounted for in the analysis. All the variables of interest, and the product category, OEM, and year dummies were also included in this model. The model has a good overall fit to the data with an R 2 value of 0.38, and a significant c 2 statistic of (p<0.001). Previous year s price concession given has a significant positive effect on current year s price concessions. Long term acceptable returns, involvement in product development, and supplier size have statistically significant (p<0.05) positive effects on the price concession given. OEM pressure to reduce prices, OEM help to reduce costs, supplier trust in OEM, and the share of sales have positive statistically insignificant effects at the.1 confidence level. Among the dummy variables, power train and chassis product categories have significantly lower price concessions than body-in-white (p<0.05), while exterior, and electrical and electronics are significantly greater (p<0.05). OEM dummies have insignificant (p>0.1) positive effects on price concessions. The year dummies 2006 and 2007 have significant

11 Market Lett (2009) 20: (p<0.05) negative effects, while others have statistically insignificant coefficients. Overall, the random effects estimation mirrors to a great extent the effects estimated using the simultaneous equation model. 3 6 Discussion As expected, the greater the OEM price reduction asked, the greater is the supplier price concession given. This positive relationship was also found with the supplier s anticipation of being able to make an acceptable long-term return on the OEM s business, the supplier s involvement in the OEM s product development process, and the OEM s pressure on the supplier to reduce prices. Both the anticipation of an acceptable long-term return and the involvement in the product development process create for the supplier a positive situation for potential future economic gain. Certainly, no supplier wants to jeopardize its economic future, therefore, it is not surprising that a supplier would be more receptive to providing its OEM customer price concessions under these conditions. The same can be said for price concessions that result from OEM price reduction pressures. If pressure from an OEM customer to undertake a particular course of action is being felt by a supplier, the supplier, in an attempt to placate its customer, will more than likely attempt to meet the expectations of its customer. When these results were discussed with a V.P. of Sales and Marketing for a major Tier 1 supplier, we were told, I m not surprised. We are not going to do everything a customer expects of us, because we have our own goals we are trying to meet. But, when we think the future looks bright and our customer is really pressuring us, we re more likely to go along with what they want. It is interesting to find that trust of the OEM did not have a significant impact on the supplier price concession. These results suggest that tangible economic outcomes are of greater importance to the salesman then the intangible conditions associated with the OEM supplier working relations. Subsequently, supplier anticipation of making money in the future, involvement in the product development process, and customer (the OEM) price reduction pressures will be of greater importance than customer trustworthiness. Similarly, the results indicate that the OEM help the supplier receives in its efforts to reduce costs has only a marginally significant positive effect on price concessions. The insignificance of the supplier size, i.e., its annual sales, on price concession given is understandable. In conversations with Tier 1 sales personnel we found no consistent manner by which larger Tier 1 suppliers respond to price reduction expectations of their OEM customers. The results reveal that the product groups with the lowest price concessions, powertrain and chassis, include parts that are among the longest lasting on a vehicle. Subsequently, over time a supplier has decreasing opportunity for annual productivity improvements. In addition, the majority of parts in these two product groups must undergo government-specified safety testing requirements conducted by the OEM, which is very expensive and time consuming, before the parts can be 3 Detailed results are available from the authors upon request.

12 72 Market Lett (2009) 20:61 74 placed in a vehicle. As a result, supplier recommended design changes which could result in price concessions may not be forthcoming until the OEM has completed its required testing, which, because of scheduling issues, can take a year or more. On the other hand, greater price concessions in interior, and electrical and electronics would be expected. Process and product modifications in interior can occur quite rapidly as safety issues are of relatively little concern, which enables price concessions to be more readily given. The speed with which process and product improvements occur in the electronics industry result in suppliers of such goods passing on savings in the form of price concessions more rapidly and frequently than is typical for other vehicle parts. The total purchases of the OEM from the supplier in the previous year have a positive significant effect on the price reduction asked of a supplier. Further, according to our results, the price concession received in the past from a supplier is a significant consideration when determining the price reductions to be asked from the same supplier. The differences in price reduction expectations across the OEMs were expected as such differences are consistent with the variation in the OEM cultures and attitudes toward suppliers. Product group differences in price reduction asked could be attributed to differences in productivity improvements and product upgrades among the groups. In addition, it can be postulated that purchasing organizations formulate their pricing expectations based on industry conditions. For example, annual product upgrades and prices decreases in the electronics industry are common knowledge and is in line with our finding that the electrical and electronics product group is associated with significantly higher price reduction expectations. These results provide, for the first time, an understanding of the dynamic nature of the impact of the buyer supplier relational environment on supplier price concessions. It is this understanding that underlies the importance of this empirical study. 7 Limitations and future research directions The focus of this study is the conditions that impact supplier price concessions when confronted with buyer price reduction demands. We did not consider the fairness of either the price reduction asked or the price concession given. Doing so, however, is an appropriate next step, since the perception of fairness by the supplier and buyer in this potentially contentious situation can impact the relationship (Gassenheimer et al. 1998) and the supplier price concession. In addition, we did not consider the governance conditions of the price reduction asked and price concession given situations studied, which has been shown to impact cost reduction outcomes (Ghosh and John 2005). Certainly, incorporating the governance conditions would be an appropriate consideration for future empirical research. Additionally, this study has some limitations that present several opportunities for future research. First, our study is limited to a single industry. One unique characteristic of the automotive industry is the large size of the OEMs relative to their suppliers. The results we found may be different in industries in which customer and supplier are more balanced in relative size. Second, we used suppliers

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