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An agency theory perspective onsupply chain quality management

Xingxing ZuDepartment of Information Science and Systems, Morgan State University,

Baltimore, Maryland, USA, and

Hale KaynakDepartment of Management, Marketing and International Business,

The University of Texas-Pan American, Edinburg, Texas, USA

Abstract

Purpose The purpose of this paper is two-fold: to examine two approaches buying firms can utilizeto manage supplier quality; and to investigate the ways in which factors inherent in supply chain

relationships affect the use of these approaches in supply chain quality management.Design/methodology/approach Drawing on agency theory, this paper proposes a conceptualframework that relates the underlying factors of a supply chain relationship to the use of qualitymanagement approaches. Two types of approaches, outcome-based and behavior-based, are discussedin terms of their focuses, purposes, and methods. Propositions are developed about the effects of thesefactors on the decisions buying firms make about supply chain quality management.

Findings This study suggests that rather than relying on one generic supply chain qualitymanagement approach for all suppliers, firms need to choose different management mechanisms fordifferent suppliers based on the salient attributes of individual suppliers and their relationships with thebuyers. Five types of agency-based factors are discussed. These factors information asymmetry, goalconflict, risk aversion of suppliers, length of relationship, and task characteristics can be expected toinfluence how firms design and manage their quality management systems for supply chains.

Practical implications A better understanding of the distinction between outcome-based and

behavior-based approaches helps managers evaluate which approach is best suited to managing thequality of their suppliers. The propositions pertaining to the key factors provide managers with someguidelines about the critical conditions they should consider when building their firms supply chainquality management system.

Originality/value Having an effective quality management system of a supply chain is essentialfor maintaining a smooth supply of high quality products and services to customers. However, little isknown about how a firm should design this supply chain quality management system. The paperaddresses this gap by applying agency theory to examine the two essential approaches to managingsupplier quality and to explore the critical factors that should be taken into account when consideringthe appropriate approaches for different suppliers.

KeywordsQuality management, Supply chain management, Suppliers, Agency theory

Paper typeResearch paper

1. IntroductionAs firms increasingly rely on extended networks of suppliers to produce and deliverproducts and services to customers, it becomes increasingly difficult to control whathappens in supply chains outside their boundaries with respect to the quality

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0144-3577.htm

The authors would like to thank Jiju Antony for his helpful comments and suggestions on thefirst version of this paper.

Supplychain qualitymanagement

423

Received 28 October 2009Revised 29 October 2010Accepted 23 March 2011

International Journal of Operations

& Production Management

Vol. 32 No. 4, 2012

pp. 423-446

q Emerald Group Publishing Limited

0144-3577

DOI 10.1108/01443571211223086


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of supplied materials. Note, for instance, the recent recalls of products ranging fromautos to toys to drugs and food. These recalls emphasize the need to pay close attentionto quality management (QM) issues in supply chains (Roth et al., 2008). The focuson supply chain management (SCM) research and practices today is zeroing in on

innovation, agility, and flexibility (Ketchen and Hult, 2007; Magretta, 1998), but therecalls are continual reminders of the vital importance of supplier quality, a strategicnecessity for achieving customer satisfaction and sustainability (Kuei et al., 2008;Sroufe and Curkovic, 2008). The lack of an effective QM system in a firms supplychain network increases the risks of supply chain disruption and may cause seriousdamage to its operation, its business performance, and its public image (Hendricks andSinghal, 2008; Roth et al., 2008).

The increasing importance of managing quality in supply chains has ignited researchinterest in this subject. Already a body of research has defined the concept of supplychain quality management (SCQM) to identify critical themes in this area (Robinson andMalhotra, 2005); explored the potential benefits of applying well accepted QM principlesand methodologies such as total quality management in a supply chain context (Lee andWhang, 2005); and investigated the relationship between QM and SCM practices andtheir effects on organizational or supply chain performance (Flynn and Flynn, 2005;Kaynak and Hartley, 2008; Park et al., 2001; Sroufe and Curkovic, 2008; Yeung, 2008).Prior studies have argued for the potential benefits of extending current firm-based QMprinciples and practices into the supply chain context, but the answers to questionsabout how to achieve effective SCQM are far more complicated than applying QM withina single organization. Traditionally, firms employ such approaches as regulations,contracts and quality inspection to control the quality of supplied materials and parts,but these tactics alone are neither sustainable nor effective in the long run (Roth et al.,2008). Firms may also need to establish cooperative relationships with suppliers for QMand improvements. These cooperative relationships benefit not just both parties but the

whole supply chain (Flynn and Flynn, 2005; Kaynak and Hartley, 2008; Park et al., 2001).But establishing these relationships requires substantial resources and long-termcommitments from both parties, though it may be neither realistic nor necessary to makesuch investments in all the suppliers that comprise a firms supply network because anetwork is likely to consist of suppliers whose products are of varying importance to thebuying firm, whose QM capabilities differ, or who have different histories with the firm(Forker et al., 1997). Thus, a critical question for buyers is: how should they arrange theirQM strategies and tactics toward different suppliers so that the quality of all supplierscan be effectively managed.

In this study we seek to answerthe above question by exploring the SCQM approachesbuying firms can utilize to manage supplier quality and examining how the factorsinherent in a relationship with suppliers influences the use of these approaches. We

examine SCQM approaches through the lens of agency theory, a well-developed theoryfor examining buyer-supplier relationships and the relevant governance mechanisms forsupply chain effectiveness (Ketchen and Hult, 2007; Rungtusanatham et al., 2007). Thisstudy contributes to research in SCQM by providing theoretical arguments forunderstanding how buying firms make decisions on QM approaches under differentsupply chain conditions.

We begin this discussion with a review of the current understanding and researchabout SCQM. Next, we introduce agency theory and its assumptions and then highlight

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the relevance of agency theory to SCQM. Then, from an agency theory perspective, wecategorize SCQM practices into two groups: outcome-based and behavior-basedapproaches. We then examine the factors that may influence buying firms use ofappropriate approaches for managing supplier quality. Relevant propositions are

derived that relate the agency-based factors in buyer-supplier relationships to theSCQM approaches. Drawing on the conceptual framework of this paper, we finallydiscuss the implications for research and practice in SCQM and offer a synthesis ofcritical questions that could form an agenda for future research in this area.

2. Supply chain quality managementTraditional QM focuses primarily on internal process control and improvement, and thisfocus emanates typically from an internal supply perspective on integrating theenterprise and unifying all organizational functions such as marketing, design,materials, purchasing, manufacturing, and management. These functions are allocatedfor the most part to individual firms within a supply channel (Robinson and Malhotra,

2005). However, because a companys output is only as good as its inputs (Forkeret al.,1997), the quality of finished products cannot be good if the supplied materials and partsare poor. When a firm purchases goods and services from suppliers, unpredictableevents may occur anywhere in the process of acquisition, delivery, and use. Thepossibility of unexpected events injects an element of uncertainty into the whole processthat can compromise an organizations ability to produce quality products and achieveits business goals. Quality-related risks exist in supply chains commonly becausesuppliers fail to maintain capital equipment, to comply with regulations or qualitystandards, to deliver parts and materials that conform to quality standards, to protectagainst damage in transit, and to maintain a safe work environment at the supplier site(Tapiero and Kogan, 2007; Zsidisin and Ellram, 2003). Supplier quality problems oreven a suspicion of quality problems can cause delays, and if quality problems are not

caught in time, they are likely to result in costly recalls later on (Sodhi and Lee, 2007).Extant research on QM has recognized that supplier QM is a key element in QM

implementation. The literature has suggested a variety of practices to manage supplierquality, such as maintaining a small number of key suppliers, providing technicalsupport to suppliers, involving suppliers in product design and process improvement,and requiring suppliers certification of quality standards (Flynnet al., 1995; Hackmanand Wageman, 1995; Kaynak, 2003). However, as the understanding ofsupply chainchanges from simply a purchasing function to a strategic resource that can improvecompetitiveness through strategic initiatives that involve collaboration with upstreamand downstream parties (Yeung, 2008), traditional QM, which is focused onintra-organization improvement, lacks a system view of the supply chain networkand thus has a limited impact on managing the entire supply networks quality

(Robinson and Malhotra, 2005; Romano and Vinelli, 2001). Robinson and Malhotra(2005) suggest that strategic QM of a supply chain needs to be chain-centered rather thanfirm-centered as it typically is in the intra-organizational perspective of traditional QM.

The body of research on the synergy of QM and SCM has grown significantly overrecent years. From a theoretical perspective, researchers have defined the concept ofSCQM (Robinson and Malhotra, 2005), compared the differences in the ways operationsmanagers and supply chain managers approach QM (Foster and Ogden, 2008),and proposed various frameworks for SCQM with critical dimensions


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(Kuei et al., 2008; Roth etal., 2008). Moreover, a large number of studies have, via surveysand case studies, empirically investigated the relationship between QM and SCM andtheir impact on performance. For example, from the viewpoint of buying firms, a groupof survey studies examined whether and how buyers implementation of QM practices

particularly those supplier-related QM practices affect their quality, operational,business, and supply chain performance (Flynn and Flynn, 2005; Forker et al., 1997;Kaynak and Hartley, 2008; Linet al., 2005; Loet al., 2007, 2009; Sanchez-Rodrguez andMartnez-Lorente, 2004; Sila et al., 2006; Sroufe and Curkovic, 2008; Tan et al., 1998;Yeung, 2008). Several other case studies explored how quality is managed in the supplychain context (Prado-Prado, 2009; Romano and Vinelli, 2001; Wong and Fung, 1999).Romano and Vinelli (2001), for instance, conducted a case study in a textile-apparelcompany. They compared different QM practices in two different kinds of supplynetworks: traditional and coordinated. Their study found that in a broader, morecoordinated supply network, the whole supply network could improve its ability to meetthe expectations of the final consumer in terms of qualitythrough the joint definition andco-management of quality practices. From the viewpoint of suppliers, a study by Park

et al. (2001) examined whether QM practices differed among a common buyers supplierswhose performance is rated as either high, or medium, or low, and it identified whichspecific practices contributed to the differences they found. Several other studies haveinvestigated how buyer-supplier relationships affect the effectiveness of QM in supplychains (Fynes and Voss, 2002; Fynes et al., 2005; Lai et al., 2005). Generally speaking,previous studies have confirmed the positive synergy of QM and SCM, and they haveanswered questions about the efficacy of integrating QM with SCM and what practicesto apply in SCQM. One critical question that has not been fully answered in the literatureis: how should buying firms implement QM practices to effectively manage the qualityof all those different suppliers in its entire supply network? This study begins answeringthis question.

3. Agency theory and SCQM3.1 An overview of agency theoryAgency theory is concerned with agency relationships. Two parties have an agencyrelationship when they cooperate and engage in an association wherein one party (theprincipal) delegates decisions and/or work to another (an agent) to act on its behalf(Eisenhardt, 1989; Rungtusanatham et al., 2007). The important assumptionsunderlying agency theory are that:

. potential goal conflicts exist between principals and agents;

. each party acts in its own self-interest;

. information asymmetry frequently exists between principals and agents;

. agents are more risk averse than the principal; and

. efficiency is the effectiveness criterion (Eisenhardt, 1989; Ekanayake, 2004;Rungtusanatham et al., 2007).

Two potential problems stemming from these assumptions may arise in agencyrelationships: an agency problem and a risk-sharing problem. An agency problem appearswhen agents goals differ from the principals and it is difficult or expensive to verifywhether agents have appropriately performed the delegated work (i.e. moral hazard).

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This problem also arises when it is difficult or expensive to verify that agents have theexpertise to perform the delegated work (i.e. adverse selection) that they claim to have.A risk-sharing problem arises when principals and agents have different attitudestowards risk that cause disagreements about actions to be taken (Eisenhardt, 1989;

Jensen and Meckling, 1976; Ross, 1973; Rungtusanathamet al., 2007).In order to resolve agency and risk-sharing problems in principal-agent relationships,

agency theory prescribes two formal (and ideal) types of management mechanisms togovern these relationships (Rungtusanatham et al., 2007). One is outcome-basedmanagement mechanism. With this mechanism both principals and agents can observeoutcomes, and the principals reward agents based on measured performance outcomes(Ekanayake, 2004). The outcome-based management mechanism emphasizes resultsregardless of how the agents achieve them (Choi and Liker, 1995). The othermanagement mechanism is behavior-based. When this mechanism is taken, principalscan use behavior controls to monitor agents behaviors and efforts which otherwise areunknown to the principals. The behavior-based management mechanism emphasizes

tasks and activities in agents processes that lead to the outcomes of the agents(Eisenhardt, 1989; Ekanayake, 2004). Accordingly, a critical issue in agency theory isdetermining which management mechanism, outcome-based or behavior-based, is moreefficient in managing agency relationships under varying levels of outcomeuncertainty, risk aversion, information and other variables (Eisenhardt, 1989, p. 60).When making this decision, managers must consider the trade-off between:

. the costs of acquiring the information necessary for monitoring the agentbehavior; and

. the costs of measuring outcomes and transferring risk to agents (Eisenhardt,1989; Rungtusanathamet al., 2007).

3.2 Relevance of agency theory for SCQMIn a supply chain relationship the buying firm acts like a principal that delegates theauthority of production and/or services to the supplier, the supplier being the agent, soboth parties are engaged in an agency relationship (Starbird, 2001; Zsidisin and Ellram,2003). Along with the delegation of production and services, the responsibility ofmaintaining satisfactory quality of the supplied products and services is also delegatedto suppliers, so buying firms need to ensure that suppliers provide products and/orservices that conform to the quality requirements stipulated in the supply contracts.Moreover, competition these days is becoming supply chain versus supply chain ratherthan firm versus firm (Ketchen and Hult, 2007), so firms are working to increasecustomer satisfaction and gain competitive advantage by finding ways to improve thewhole supply chain, from suppliers to end consumers. Strategic QM of supply chains not

only ensures the quality of supplies, but also enhances the capabilities of suppliers QM.Managing supplier quality, then, involves frequent, continuous interactions betweenbuying firms and their suppliers in tackling such various issues as negotiatingcontractual provisions related to quality requirements and rewards, penalties andinspection policies, specifying requirements on the suppliers quality qualificationand certification, and collaborating on product design and process improvement (Flynnand Flynn, 2005; Kaynak and Hartley, 2008; Kueiet al., 2008; Robinson and Malhotra,2005; Starbird, 2001). A well-developed agency theory is thus particularly useful


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in understanding the use of management mechanisms for SCQM and the attributes ofsupply chain relationships.

The assumptions and prescriptions of agency theory fit naturally with the issuesinherentin SCQM. In the process of managing supplier quality, buyers in agency relations

are, as we have pointed out, faced with potential problems. By their nature, buyers expectsuppliers to provide good quality and to improve the quality of supplied products and/orservices, but suppliers may be reluctant to invest substantially in quality, especially ifthey perceive that buyers are reaping all the benefits. The difference in interests betweenbuyers and suppliers will result in the two parties concerning themselves only with theirself-interests. At this point moral hazard and adverse selection problems are likely to arise.When buying firms cannot constantly monitor the process at suppliers sites, which isusually difficult or expensive to do so, suppliers mayconceal their difficulties in deliveringthe quality demanded by buyers (i.e. adverse selection) and slight efforts to control andimprove the product and process quality as expected (i.e. moral hazard) (Starbird, 2003;Swink and Zsidisin, 2006). Furthermore, buyers and suppliers may have differentattitudes toward risks associated with quality failures, especially those that occur aftersales to end consumers, a situation that will result in risk-sharing issues between buyersand suppliers. Thus, when making decisions about how to manage supplier qualityperformance, buyers need to assess the nature of their buyer-supplier relationships inorder to select the appropriate management mechanism.

3.3 Outcome-based versus behavior-based approaches for SCQMOrganizations apply various management practices (e.g. rewards and penalties,inspection, supplier training, supplier auditing, supplier certification, supplierinvolvement, and so on) to manage supplier quality. According to agency theory, SCQMpractices can be categorized as outcome-based approaches or behavior-based approaches.Table I draws on literature in QM, SCM, and agency theory to present a summary of these

approaches in terms of their focus of management, purposes, and methods.The outcome-based approaches are more concerned with reducing the detrimental

effects of supply-risk events than with reducing the likelihood of a detrimental event(Zsidisin and Ellram, 2003). In the process of managing supplier quality, the most directapproach for buyers to assess suppliers quality performance is to inspect incomingmaterials and parts for defects. Other measures of supplier quality performance caninclude number of rejects, production stoppages due to poor quality, rework in dollars orhours, scrap generated during material use, customer complaints, acceptable materialwithout deviation and warranty costs resulting from failures (Chenet al., 2004). Buyersalso can assess supplier quality performance via qualitative measures includingproblem resolution ability, technical ability, corrective action response, and new productdevelopment support (Chen et al., 2004). Two typical outcome-based approaches are

quality-related contractual provisions and quality inspection of products and servicesdelivered by suppliers. Contractual provisions for quality in purchasing contracts setexplicit quality requirements for suppliers and include rewards for better quality,penalties for poor quality, and rules for inspecting quality, which can affect theoperational policies and performance of buyers, suppliers, and their relationships(Starbird, 2001). The desired level of quality performance can be communicated anddetermined through provisions for quality in contracts (Reyniers and Tapiero, 1995;Starbird, 1994, 2001; Tagaras and Lee, 1996; Tsay et al., 1998).

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Quality inspection is used to judge the quality of products, based on buyer-specifiedquality characteristics, delivered by suppliers. In a supply chain contract, buyerinspection policies are typically combined with penalties and rewards to motivatesuppliers to provide the desired quality (Reyniers and Tapiero, 1995). Close inspectionof the quality of incoming materials and parts is typically executed to reduce thenumber of defects entering the process (Gitlow et al., 1989; Starbird, 2001).

Issues Outcome-based approaches Behavior-based approaches

Focus ofmanagement

The quality of products and/orservices delivered by suppliers

Suppliers efforts in QM and improvement

Purpose Control the quality of deliveredproducts and/or services

Ensure that suppliers can meet the qualityrequirements and improve their ability to do so

Methods Contractual provisions for quality Supplier quality certificationQuality requirementsRewards for qualityPenalties for quality failuresInspection policies

Quality inspectionInspect delivered products and/

or servicesChoose from no inspection,

sampling inspection, to 100 percentinspection

Passive quality control

Used as a criterion of supplier selection toensure that suppliers have established theappropriate QM system to deliver the qualitydesired by buyers

Typical certification standards include ISO9000series, TS16949 in the automotive industry, orAS9100 in the aerospace industry

Supplier quality auditAssess compliance and effectiveness of the

suppliers quality systems

Identify faults or non-conformance at suppliersites for a negotiating lever (compliance audit)

Identify areas for improvement for mutualbenefit (performance/value-added audit)Supplier process management:

Promote the implementation of QM systems atsupplier facilities

Focused on suppliers internal operationalpractices

Primary purpose is to improve the suppliersability to satisfy the needs and expectations ofbuying firmsSupplier quality development:

A long-term, planned, strategic effort to

improve supplier capabilities in quality assuranceand improvement

Focused on strategic initiatives aiming atsustaining beneficial buyer-supplier relationshipsfor long-term supply needs

Primary purpose is to create a capable supplierbase and leverage the benefit of supplymanagement

Source: aAnderson and Oliver (1987), Chen et al. (2004), Curkovic and Handfield (1996), Eisenhardt(1989), Flynn et al. (1994, 1995), Forker et al. (1997), Forza and Filippini (1998), Gitlow et al. (1989),Huang and Keskar (2007), Karapetrovic and Willborn (2000), Kaynak (2003), Kaynak and Hartley(2008), Linet al. (2005), Reyniers and Tapiero (1995), Robinson and Malhotra (2005), Saunders (1994),Starbird (1994, 2001), Tagaras and Lee (1996), Terziovskiet al.(2003), Tsayet al.(1998), Yeung (2008)

and Zsidisin and Ellram (2003)

Table I.Outcome-based versusbehavior-based SCQM

approachesa


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Behavior-based approaches are intended to address supplier processes rather thanoutcomes (Anderson and Oliver, 1987; Zsidisin and Ellram, 2003). Robinson andMalhotra (2005) propose that SCQM is process-centric and involves coordination andintegration of the business processes of both buyer and supplier to measure, analyze

and improve quality of products, services andprocesses so as to createvalue and achievehigher customer satisfaction. Open communication and improved information sharing,monitoring the progress and actions of suppliers, and closer relationships with suppliersall motivate suppliers to make a greater effort to improve their internal processes, whichin turn leads to better quality performance (Eisenhardt, 1989; Forker et al., 1997;Kaynak and Hartley, 2008; Lin et al., 2005; Zsidisin and Ellram, 2003). Behavior-basedSCQM approaches include supplier quality certification, supplier quality audit, supplierprocess management, and supplier quality development, all of which focus onimproving the supplier behaviors and processes in managing quality.

Supplier quality certification is commonly demanded in supplier selectionso that buyers can ascertain that suppliers have established the appropriate QMsystems to deliver the quality desired by buyers (Huang and Keskar, 2007). Supplierquality auditis used to assess compliance and effectiveness of suppliers quality systems,i.e. determining whether suppliers are following agreed upon processes and proceduresexpected by buyers (Karapetrovic and Willborn, 2000; Saunders, 1994). Supplier processmanagementis an approach intended to improve the abilities of suppliers to satisfy theneeds and expectations of buyers by promoting the implementation of QM systems insupplier facilities (Zsidisin and Ellram, 2003). Supplier quality developmentmakes along-term, planned, strategic effort to improve supplier capabilities for qualityassurance and improvement. The objective is to create a capable supplier base andleverage the benefit of supply management (Robinson and Malhotra, 2005; Yeung, 2008;Zsidisin and Ellram, 2003). Supplier process management is focused on improving theinternal process of suppliers; supplier quality development, on the other hand, is

concerned more with strategic initiatives aiming at sustaining beneficial buyer-supplierrelationships for long-term supply needs (Yeung, 2008; Zsidisin and Ellram, 2003).

4. Decisions on SCQM approachesAgency theory proposes that agents tend to engage in self-serving, opportunisticbehavior when opportunities arise (Ekanayake, 2004). To ensure that agents act in theinterests of principals, management mechanisms (e.g. structures, procedures,information systems, monitoring, performance evaluation, rewards, and penalties) areneeded to help principals constrain opportunistic behavior by reducing opportunitiesand increasing incentives for not engaging in such behavior (Ekanayake, 2004).Accordingly, firms apply decision criteria based on the alignment of differentmanagement mechanisms with attributes of the principal-agent relationship and the

underlying contracting environment (Anderson, 1985; Demski, 1980; Eisenhardt, 1989;MacCrimmon and Wehrung, 1986). Governance structures are appropriate when theyprovide adequate safeguards and controls over agents without increasing bureaucraticcomplexity and unnecessary costs (Holcomb and Hitt, 2007). In SCQM, the choicebetween outcome-based and behavior-based approaches is particularly important whendetermining whether buying firms can effectively manage supplier quality. On the onehand, outcome-based approaches are routine practices and relatively easy to apply, butthey may not be strong enough to exert control over a suppliers risky,

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self-interested behavior regarding quality. On the other hand, behavior-basedapproaches demand substantial investments and often have long lead-times beforereturns are realized. But at the same time they may offer potential long-term benefits to abusiness. Next, we examine how key agency-based factors can influence buyers

decisions on the use of SCQM approaches. These factors, summarized in Table II, areinformation asymmetry, goal conflict, risk aversion, length of relationship, and taskcharacteristics.

4.1 Information asymmetryIn a principal-agent relationship, information asymmetry refers to a situation when oneparty in the relationship has more or better information than the other. This asymmetrycreates an imbalance of power in transactions and causes adverse selection and moralhazard problems (Eisenhardt, 1989). When principals cannot observe the behavior of itsagents, it cannot perfectly evaluate their capabilities for performing required tasks, thusmaking it possiblefor agents to exert a high or low level of effort in secret. This secrecy isa problem especially when it comes to non-programmable tasks (Ekanayake, 2004).Information about agent behavior is critical for restraining opportunistic behaviorsbecause information lets principals know what agents are actually doing, and agents, ofcourse, will realize that they cannot deceive the principals (Eisenhardt, 1989). Difficultyand costs of collecting information about agent behavior are thus a major concern indetermining what is appropriate for managing the agency relationship (Eisenhardt,1989; Rungtusanathamet al., 2007).

QM is management by fact, and it requires the systematic collection and analysis oftimely and correct quality-related data and information so that quality problems can beidentified early and actions can be taken to rectify them (Hackman and Wageman, 1995).In SCQM, it is important that buyers gather and analyze information about thecapabilities and performance of their suppliers. With this kind of information, they will

be able to verify whether their suppliers can deliver the anticipated quality and whethertheir quality control and management operations are appropriate (Kaynak and Hartley,2008). This knowledge can help buying firms control false claims by suppliers abouttheir QM ability. Compared to collecting data within an organization, collecting datafrom suppliers is more difficult and costly, especially when there is no agreementbetween a buying firm and its suppliers about sharing quality-related information.A suppliers quality performance and capability can be reflected in two aspects:product quality and process quality. Process quality shows suppliers processvariability and has an influence on product quality (Sousa and Voss, 2002).

Agency-based factors Outcome-based approaches Behavior-based approaches

Information asymmetry High LowGoal conflict High LowRisk aversion of a supplier Low HighLength of relationship Short LongTask characteristics

Task programmability of a supplier Low HighOutcome measurability Easy DifficultOutcome uncertainty Low High

Table II.Agency-based factors

and SCQM approaches


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Information about both types of quality performance is important for understandingsupplier capability in quality control and management. Buying firms usually can haveinformation about suppliers product quality because they can check quality of theproducts delivered by their suppliers through inspection, a typical provision in purchase

contracts. However, not all suppliers are obligated or willing to share real-time internalprocess quality data with buyers, unless there is such a provision in the contract.

Thus, in the context of SCQM, information asymmetry is concerned more withwhether buyers can have access to information about suppliers process qualityperformance and capability, such as suppliers internal process quality data, theirquality control procedures, and their quality improvement programs and the results ofthese programs. When suppliers are reluctant to share their own internal quality datawith buyers or they provide false information (i.e. information asymmetry is high),buyers have to resort to outcome-based approaches to manage supplier quality. Theseapproaches rely on quality-related contractual provisions and inspection of deliveredproducts. The problem with this approach is that only final product quality can beassessed and there is no control over how suppliers achieve quality and some hidden

quality problems may not be detected.On the other hand, when suppliers are willing to share their internal quality data with

buyers, buyers will have the information necessary to accurately assess suppliers QMability and behaviors, and they will be able to conduct this assessment in a relativelycost-efficient manner. In conditions characterized by low information asymmetry, i.e. theinformation disparity between two parties is not great, behavior-based approaches arepreferable to outcome-based approaches (Rungtusanathamet al., 2007). When there isopen communication and cooperation between two parties, buyers are able to observeand assess suppliers actual behaviors in managing quality, thus making buyers moreamenable to investing in behavior-based approaches such as providing technicalassistance to suppliers; offering training programs to supplier staffs; or involvingsuppliers in design and production teams. These practices are intended to help suppliersimprove their ability to deliver high quality products and services consistently, therebyreducing the risk of quality failure stemming from the source (Flynn and Flynn, 2005;Robinson and Malhotra, 2005). It can be expected that such efforts in supplier QM andimprovement will receive more positive responses and results from cooperativesuppliers. Thus, we propose that:

P1. When buying firms perceive low information asymmetry between them andsuppliers (when suppliers are willing to share their internal quality data withthe buying firms), buyers tend to rely more on behavior-based approachesthan outcome-based approaches to managing supplier quality.

4.2 Goal conflictGoal conflicts between principals and agents trigger problems in their relationshipsbecause agents are self-interested. They can be counted on to attempt to exert lesseffort (moral hazards) and claim, explicitly or otherwise, higher capabilities and skillsthan they actually have (adverse selection) (Eisenhardt, 1988; Ekanayake, 2004;

Jensen and Meckling, 1976). When no goal conflict exists in an agency relationship,agents will behave as expected whether their behavior can be monitored or not(Eisenhardt, 1989). Thus, it is important to align agents goals with those of theprincipals (Ekanayake, 2004). As goal conflict is reduced, a principals costs associated

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with risks of moral hazard and adverse selection are also reduced, and behavior-basedmanagement mechanism becomes more attractive than outcome-based mechanism(Demski, 1980; Eisenhardt, 1989).

It can be assumed that buyers and suppliers are distinct organizations capable of

some degree of cooperation, but they also have partial goal conflict as well (Zsidisin andEllram, 2003). Reducing goal conflict, or increasing goal congruence, is consideredcritical for success in exchange relationships (Luo, 2002). Goal congruence benefitssupply chain relationships by encouraging cooperation between firms, promoting thecommon interests of supply chain partners, reducing the probability of opportunism,decreasing the need for formal contractual arrangements, and lowering the cost ofmonitoring (Holcomb and Hitt, 2007). Behavior-based approaches for managing supplierquality are built upon cooperation and commitment, which are nurtured in an exchangeenvironment of goal congruence. Strong, mutual supply chain partnerships help solidifythe intangible characterization of quality and create definitions that support finalcustomer quality (Mangiameli and Roethlein, 2001). Joint definitions andco-management of goals by buyers and suppliers in strong partnerships improve the

ability of supply chain networks to meet the expectations of final consumers (Romanoand Vinelli, 2001). Shared quality goals align the efforts of both buyers and suppliers inmatters of QM and improvement. Thus, we propose that:

P2. When buying firms perceive a low level of goal conflict with their suppliers,they tend to rely more on behavior-based approaches than outcome-basedapproaches to managing supplier quality.

4.3 Risk aversionIn essence, risk aversion is about settling for a lower profit to avoid the risk of anuncertain return, or, in other words, being willing to pay more to avoid risks (Hilton,1989; Pratt, 1964; Starbird, 1994). In SCQM, suppliers level of risk aversion is related to

their attitudes toward risk that may cause quality-related problems with productssupplied to buyers. From the suppliers standpoint, reducing quality-related risk impliesincreased material and labor costs and demands them to make more investments in QM.For instance, they need to select better but more expensive materials over lower qualitycheaper materials, add quality control personnel, invest in quality improvementprograms, and so on. As suppliers have control over the quality of their products, theywill deliver the product quality that maximizes their expected return. Suppliersattitudes toward quality-related risk will influence their behavior in QM and thus thequality of the products they provide to buyers (Starbird, 1994). Suppliers who are morerisk averse are likely to invest in QM practices and related preventative activities toreduce the risk of quality problems and failure, and to improve their capability ofproviding better quality to customers. The suppliers of low risk aversion are likely

to slack off their product and process QM.Agency theory suggests that the degree of risk aversion of agents affects a principals

intention to transfer risks to agents. When the level of agents risk aversion decreases orprincipals become more risk averse, it is easier to transfer risk to agents andoutcome-based control is preferred (MacCrimmon and Wehrung, 1986). Suppliers whohave a low level of risk aversion toward quality are more likely to produce defectiveproducts due to limited quality control. When dealing with these suppliers, it is moreappropriate and important to control product quality with outcome-based approaches


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that use inspection of incoming lots (typically via acceptance sampling) and reject thosethat do not meet the quality requirements specified in the contract. Also, it is easier forbuyers to get low risk-averse suppliers to agree on more strict inspection policy. Forsuppliers who are more risk averse, it becomes increasingly expensive to pass risk to

these suppliers, and then behavior-based approaches become more appealing(Eisenhardt, 1989). Those suppliers are more likely to apply strict quality controlprocedures and invest in QM practices to improve their process and product quality sothat they can reduce the proportion of defective goods going into each delivered lot anddeliver better quality products to buyers (Starbird, 1994). Under these conditions,behavior-based approaches to managing supplier quality, especially supplier processmanagement and supplier quality development practices, are more effective inmanaging supplier quality than outcome-based approaches because risk-aversesuppliers are more willing to cooperate with buyers to improve their QM capabilities soas to reduce their risk of quality problems and failures. Therefore, we propose that:

P3. When buying firms perceive that suppliers have a high level of risk aversion

toward quality-related problems and failures, they tend to rely more onbehavior-based approaches than outcome-based approaches to managingsupplier quality.

4.4 Length of relationshipPrevious cooperation experience between supply chain partners nurtures a climate oftrust, openness, and confidence (Holcomb and Hitt, 2007). Agency theory postulatesthat when principals and agents engage in long-term relationships, principals willlearn more about agents and thus be able to assess agent behavior more readily. Thiscapability makes behavior-based approaches more attractive than outcome-basedapproaches, whereas in a short-term relationship, information asymmetry betweenprincipal and agent is greater, thereby making outcome-based approaches more

appropriate than behavior-based approaches (Eisenhardt, 1989).In strategic SCM, firms build long-term relationships with key suppliers through

repeated ties or interactions, and these allow buyers access to information about thereliability and performance of suppliers, which help to reduce information asymmetries,increaseawareness of specialized capabilities,and establisha basisfor trust(HolcombandHitt, 2007). When buyers trust suppliers and believe that they can rely on suppliers tomeet their obligations and suppliers will act fairly when the possibility for opportunismarises, the risk of adverse selection is reduced and the level of collaboration is improved(Holcomb and Hitt, 2007). Collaboration and integrationwith suppliers are key elements ofestablishing an effective QM system in supply chains (Robinson and Malhotra, 2005).

Building long-term relationships with a small number of suppliers is essential tomaximizing the suppliers contribution to quality performance (Flynn et al., 1995).Successful relationships encourage suppliers to become involved in the product orservice design process improvement efforts, which in turn lead to improved quality ofproducts and services (Flynnet al., 1995; Fyneset al., 2005; Kaynak and Hartley, 2008).From the suppliers standpoint, a stable relationship promotes their commitment to thelevel of quality expected by buyers, especially when suppliers perceive a certaintyof supplying to a buying firm for an extended period (Lai et al., 2005). This certaintyreduces the chances of moral hazard that can arise when suppliers skimp on qualityassurance and improvement efforts. We thus propose that:

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P4. When buying firms and suppliers have long-term cooperative relationships,buyers tend to rely more on behavior-based approaches than outcome-basedapproaches to managing supplier quality.

4.5 Task characteristicsThe attributes of tasks delegated to agents influence the use of managementmechanisms in agency relationships. Because the nature of work involved in QM is tiedto the products, services, and/or processes, the characteristics of production and servicesperformed by suppliers are expected to influence the approaches buying firms choose formanaging supplier quality. Three aspects of task characteristics are discussed here: taskprogrammability, outcome measurability, and outcome uncertainty.

Task programmability refers to the e xtent that b uyers can specifyappropriate agent behavior in advance, and behavior parameters defined up front easethe task of measuring that behavior (Eisenhardt, 1989). The more programmable the tasksprincipals delegate to agents, the more easily agents work can be observed and the

more readily buyers can assess the behavior of their agents (Eisenhardt, 1988;Rungtusanatham et al., 2007; Stroh et al., 1996). When information about agents behaviorcan be obtained easily, behavior-based approaches are preferable (Eisenhardt, 1989).A standard product with a routine task environment implies high task programmabilitybecause the required production process can be precisely defined, whereas a uniqueproduct implies low task programmability (Keebler, 2001). When purchasing standardproducts from suppliers, it is easy for buyers to know what the production process shouldbe and to evaluate whether suppliers are managing quality as they should. It is thus easierto apply behavior-based approaches on suppliers, such as monitoring suppliersprocesses, performing quality audits, or offering technical assistanceand guidance. Theseapproaches can help buyers stipulate suppliers behavior toward their desiredperformance level (Eisenhardt, 1989; Van Ackere, 1993).

On the otherhand, when suppliers offerunique, differentiated products, buyers usuallylack the production-process knowledge necessary to monitor and assess suppliersQM efforts. And, suppliers of specialized products may be more reluctant to share theproduction process information with the buyers. When this happens, buyers need to relyon outcome-based approaches to managing supplier quality. Therefore, we propose that:

P5a. When buying firms perceive that task programmability of suppliers is high,they tend to rely more on behavior-based approaches than outcome-basedapproaches to managing supplier quality.

Another task-related factor is outcome measurability, which is concerned with how easilyoutcomes of a task can be measured, both in terms of the difficulty of measuring or thedifficulty of measuring within a practical length of time (Eisenhardt, 1989). For the tasks

that have outcomes difficult to measure, behavior-based approaches are preferable,whereas when the difficulty of measuring outcomes is reduced, outcome-basedapproaches are preferred (Anderson, 1985; Eisenhardt, 1989). Accurate definition andmeasurement of quality is fundamentalin achieving quality. To measure quality, we mustfirst define what we mean by quality. Quality gurus have strongly suggested if firms are toprovide products or services that customers want, it is essential to explicitly identify andassess customer requirements (Hackman and Wageman, 1995). Quality indicators andmetrics need to be determined based on critical-to-customer characteristics.


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In managing supplier quality, it is critical that both buyers and suppliers have a reliableway to define and measure the quality of products and services delivered. Buying firmsneed to know what quality attributes to measure so that they can accurately gauge theproduct quality of delivered goods. At the same time, suppliers want to know what quality

characteristics buyers want and what quality level is expected so that they can arrangetheir production accordingly.

Quality is multi-dimensional (Sousa and Voss, 2002). Garvin (1987) proposes eightcritical dimensions of quality: performance, features, reliability, conformance, durability,serviceability, aesthetics, and perceived quality. Not all quality dimensions can beobjectively defined as quantitative metrics becausesome qualityattributes are subjectivelydetermined. Others, like durability for instance, cannot be directly measured at the timebuyers receive delivery. When buyers can define the quality attributes they expect fromsuppliers in measurable terms, it becomes easy to define them explicitly in contracts anddirectly inspect for them. In these circumstances, outcome-based approaches are preferredto managing supplier quality. However, when purchased products possess qualityattributes that are indistinct and difficult to measure, buying firms need to ensure thatsuppliers are reliable and capable of maintaining the stable, functional processes to deliverdesired quality. In these circumstances, such behavior-based approaches as requiringquality certification, auditing supplier processes, and offering assistance to control andimprove suppliers processes are preferable. Thus, we propose that:

P5b. When buying firms perceive that the anticipated quality attributes ofdelivered products from suppliers are difficult to measure, they tend to relymore on behavior-based approaches than outcome-based approaches tomanaging supplier quality.

Outcome uncertaintyrefers to uncontrollable variations in outcomes of agent behavior,which may happen as a consequence of government policies, economic climate,

competitor actions, and technological change, and other things that might affect theiroutcome. Someone will have to bear the risks of these uncontrolled variations(Eisenhardt, 1989). Outcome-based approaches transfer risks to agents (Eisenhardt,1989). When outcome uncertainty is low, the costs of shifting risk to agents are low, sooutcome-based approaches become more attractive than behavior-based approaches.But when the level of uncertainty increases, it becomes increasingly expensive to shiftrisk to agents. At this point behavior-based approaches become preferable tooutcome-based approaches (Eisenhardt, 1989). Delivery of quality in products and/orservices is, by nature, imbued with a degree of uncertainty because production processesare inevitably affected by natural and unnatural disturbances, and thus the potential forvariability almost always exists (Benneyan, 1998; Shewhart, 1931).

Predictability of supplier product quality is influenced by the capabilities of suppliers

production systems (Forker etal., 1997) as well as by such external factors as frequency ofnew product introduction (Claycomb et al., 2002). When the probability of qualityproblems is high, either due to variability in suppliers production and delivery processesor external disturbances and changes, behavior-based approaches are necessary andmore effective for reducing process variability and the chance of quality failures. Inessence, QM techniques are to identify the causes of quality problems so that processvariability can be reduced and consistent product and service quality can be delivered(Wilson etal., 1993). Quality certificationand audit of suppliers help ensure that suppliers

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processes are both stable and appropriate. Supplier process management and supplierquality development are proactive practices to reduce process variability and improvesuppliers process capability to deliver better quality. Thus, we propose that:

P5c. When buying firms perceive that the uncertainty of suppliers achievinganticipated product quality is high, buyers tend to rely more on behavior-basedapproaches than outcome-based approaches to managing supplier quality.

5. Discussion and conclusionRecent research suggests that the synergy of QM and SCM practices is critical for asuccessful supply chain (Flynn and Flynn, 2005; Robinson and Malhotra, 2005). Havingan effective QM system in a supply chain network is essential for maintaining a smoothsupply of high quality products and services to customers. The challenge is building aneffective SCQM system for the entire network. Constructing this system is a morecomplicated endeavor than implementing QM within a single organization or workingwith one supplier because often firms supply chain networks are comprised of different

suppliers with varying merits. With this variety of merits come characteristics thatdiffer from supplier to supplier, different relationships with buyers, different supplycontracts, and different products and services. A single management mechanism maynot be applicable to all suppliers; this is not a one-size-fits-all situation. Taking thiscomplexity into account, we suggest a differentiated view for managing supplierquality. Drawing on agency theory, we categorize SCQM practices into outcome-basedand behavior-based approaches to help understand the management mechanismsbehind these practices. In the rest of this section, we offer significant implications of theconceptual framework presented in this paper for research and practice, respectively.We also suggest some directions for further research.

The literature on quality engineering often discusses outcome-based approachessuch as contracts and inspection policies, while QM literature is more oriented toward

behavior-based approaches and their effects on performance. We argue that both typesof approaches are essential to an effective SCQM system. Prior studies providecase-specific evidence showing how firms use different QM approaches in their supplychain networks (Prado-Prado, 2009; Romano and Vinelli, 2001; Wong and Fung, 1999).A survey study investigating the propositions suggested earlier in this study will addto the literature with large-scale empirical evidence that will help establish the mosteffective way to implement SCQM in relation to agency-based factors. It will alsoadvance theory development of SCQM and provide generalizable guidelines thatpractitioners can use to build effective SCQM systems.

Testing the propositions presented in this study will require operationalization ofthe research variables. The literature discussed earlier and summarized in Table I canbe used by researchers to develop multi-item, multi-scale measures of outcome-based

and behavior-based approaches. While agency theory has been largely studied andtested in different research streams, little operationalization of these factors has beendone in the operations management field, and few scales can be directly transferred toa study of these factors in an SCQM context. To facilitate the process of empiricaltesting, we conducted a literature search on empirical studies in several fields includingmarketing, human resource management, organizational studies, and informationsystems. The identified scales that are most relevant to the theoretical meaning ofagency-based factors in an SCQM context are presented in Table III.


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Construct Meaning in SCQM context Relevant measurement in literature

Informationasymmetry

The degree to which buying firmsperceive that suppliers share internalquality data and performance (Carr andKaynak, 2007; Eisenhardt, 1989;Flynn and Flynn, 2005; Robinsonand Malhotra, 2005;Rungtusanatham et al., 2007)

Buyer-supplier information sharing (Caiet al., 2010; Carr and Kaynak, 2007):perceived, multi-item scale

Buyer decision-making uncertaintyabout its suppliers due to lack ofinformation (Gaoet al., 2005):perceived, multi-itemscaleSupplier confidential informationsharing (Doney and Cannon, 1997):perceived, two-item scale

Goal conflict The degree to which buying firmsperceive that suppliers disagree on goalsand strategies for quality (Eisenhardt,1989; Robinson and Malhotra, 2005;

Romano and Vinelli, 2001;Rungtusanatham et al., 2007; Zsidisinand Ellram, 2003; Zsidisin and Smith,2005)

Two-stage shared values measure(Morgan and Hunt, 1994): differencebetween responses to two itemsFrequency of disagreement and overall

level of perceived conflict (Hinds andMortensen, 2005; Lusch, 1976;Wilkinson, 1981): perceived, multi-itemscaleGoal congruence (Jap, 1999, 2001):perceived, multi-item scale

Risk aversiontoward qualityrisks

The degree to which buying firmsperceive that suppliers are willing totake the risk of having quality-relatedproblems or potential failures in theirproducts (Eisenhardt, 1989;Rungtusanatham et al., 2007;Zsidisin and Ellram, 2003; Zsidisinand Smith, 2005)

Managerial risk propensity/aversion byboldness of behaviors, tendency to makequick decisions, tendency to take high-risk projects (Gilley et al., 2004;Kocabasoglu et al., 2007; Menon et al.,1997; Miller, 1988; Sitkin and Weingart,1995): perceived, multi-item scale

Length ofrelationship

The duration of buyer-supplierrelationships (Eisenhardt, 1989;Heide and Stump, 1995; Zsidisinand Smith, 2005)

Number of years doing business withsuppliers (Buvik and Halskau, 2001;Buvik and Haugland, 2005; Kotabeet al.,2003): single item, objective measure(reported by respondents)

Taskprogrammability

The degree to which buying firmsperceive that they know aboutsupplier production procedures andtechniques (Eisenhardt, 1989; Zsidisinand Smith, 2005)

Standardization and clarity of processesand procedures in tasks, jobresponsibility and results (Goodaleet al.,2008; Strohet al., 1996): perceived, multi-item scaleProcess predictability in terms of projectoutcomes and progress (Nidumolu andSubramani, 2003): perceived, multi-itemscale

Outcomemeasurability

The degree to which buying firmsperceive how easily they can measurethe quality of products delivered by thesupplier (Beamon, 1999; Eisenhardt,1989; Rungtusanathamet al., 2007)

Possibility and easiness of measuringwhether intended goals are met(Goodale et al., 2008; Kirsch, 1996):perceived, multi-item scale

Buyer monitoring ability of suppliersopportunistic behavior (Morgan et al.,2007): perceived, multi-item scale

(continued)

Table III.Constructoperationalization foragency-based factors

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With regard to the operationalization of research variables, we should address severalissues. First, because the propositions in this study, with the exception ofP4, focus on theperceptions of buyers, perceptual measures of agency-based factors should be used.The literature supports the notion that managers understanding and interpretations of theenvironment lead to their decisions and subsequent actions (Lant et al., 1992; Thomas et al.,1993). Second, most of the measures for agency-based factors presented in Table III werenot developed in an SCQM context, thus, future empirical research should adapt them tothis context. Third, some of the measures are not direct measures of agency-based factorsbut areproxy measures forthem. Forexample, a close look at the items in the scale of buyerdecision-making uncertainty about its suppliers due to lack of information(Goa et al., 2005)reveals that the scale can be used as a proxy measure for information asymmetry. Likewise,risk propensity can be used as a proxy measure of risk aversion because it forms acontinuum from risk averse (Kocabasoglu et al., 2007, p. 1143). Fourth,P4 must be tested ina way that considers the nature of the accumulation of experiences at a decreasing rate.

Thus, a non-linear transformation of length of relationship (the natural logarithm oflength of relationship) may be necessary (Buvik and Haugland, 2005; Kotabe et al., 2003).

This study also implies that research on SCQM needs to take a system view ofsupply chain networks. Buying firms must effectively control the quality performanceof all their suppliers because the quality of the final product is the product of all inputs.Effective QM on one dyad of a buyer-supplier relationship may not indicate the successof the whole SCQM system. Accordingly, assessment of SCQM effectiveness needs totake all suppliers performance into account to evaluate how well the firms apply QMpractices along the entire chain. In addition, as firms use differentiated approaches fordifferent suppliers, future research can assess the configuration of an SCQM systemand the contextual factors that influence this configuration, taking into considerationthe fact that different firms face different operating and market environments.

Contextual factors that may be relevant to this study in agency theory and QMliterature include technology uncertainty (Stump and Heide, 1996), environmentaldynamism (Li and Simerly, 1998), maturity of the QM systems (Flynn and Flynn, 2005;Sila, 2007), competition intensity, and existing level of monitoring (Banker et al., 1996).

This study also has important implications for managerial practice of SCQM.Having an effective QM system in a supply chain is a necessary condition for a firmssurvival and success. To build an effective SCQM system, managers mustunderstand the advantages and disadvantages of different SCQM approaches.

Construct Meaning in SCQM context Relevant measurement in literature

Outcomeuncertainty

The degree to which buying firmsperceive that uncontrollable variations

can happen that affect the quality ofproducts delivered by suppliers(Eisenhardt, 1989; Reedet al., 1996;Rungtusanatham et al., 2007; Sitkin et al.,1994; Zsidisin and Smith, 2005)

Objective measures of environmentuncertainty based on industry

information (Eisenhardt, 1988)Environmental uncertainty issuesaffecting the market for the product line(Celly and Frazier, 1996): perceived, five-point semantic differential scaleDemand uncertainty and productchurning (Claycomb et al., 2002):perceived, multi-item scale Table III.


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Outcome-based approaches are routine procedures in supplier QM and are relativelyeasy to implement. However, when this type of SCQM approach is employed, buyerscannot determine how the quality is achieved. Then, the optimal level of quality thatcan be achieved is subject to the existing capability of the supplier and the strictness of

contractual provisions and inspection. Thus, the weakness of this approach is that thepotential risk of quality failure lurks in products, services, and processes.

On the other hand, behavior-based approaches focus on ensuring that supplierprocesses are stable, capable, and reliable. This focus is intended to reduce the sourcesof risk that threaten quality, particularly by improving suppliers capability forenhancing quality. The application of behavior-based approaches, however, demandslong-term investment and efforts by all parties. Thus, the constraints of financial andhuman resources may make the use of behavior-based approaches for an entire set ofsuppliers unrealistic. This is a dilemma for managers who face crucial decisions abouthow to set up an SCQM system in the supply chain network so that the quality of allsuppliers can be effectively controlled. The group of agency-based factors discussed inthis study can serve as a guideline for managers who want to customize SCQMapproaches for individual suppliers according to the suppliers unique characteristics.

When firms decide whether to invest in the behavior-based approaches for a specificsupplier, there are several critical factors that should be taken into consideration. Thepropositions in this study link governance choices to the attributes of individualbuyer-supplier relationships and related contracting environment so that differentiatedmanagement mechanisms can be used for different suppliers. Factors such as informationasymmetry, goal conflict, risk aversion, and length of relationship take into account theconditions of power and interests inherent in the buyer-supplier relationship while othersrelating to task characteristics task programmability, outcome measurability andoutcome uncertainty address the nature of work that is delegated to the supplier.

To improve customer satisfaction, firms are placing greater emphasis on the quality of

their supply chains. However, little is known about how firms should design their SCQMsystems. Drawing on agency theory, this paper offers a conceptual framework to addressthis question. It applies agency theory to study SCQM because, in its essence, managingsupplier quality entails interactions between buyers and suppliers. There are othertheories that offer insightful logic for research on SCQM. Resource dependence theory, forexample, may help researchers investigate how firms manage quality when they areforced to rely on certain suppliers in product or service delivery of strategic importance.Institutional theory could be used to investigate how suppliers respond to the pressure forQM and improvement applied by buyers. In this regard, it would be illuminating toexamine the role power plays in these circumstances. Application of organizationaltheories to the study of SCQM practices is particularly valuable for the development of theQM field. Theory-guided research will not only help researchers develop a deeper

understanding of SCQM issues, it will also provide practitioners with valid guidelines forimproving their business practices so that they reap the benefits effective SCQM offers.

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Corresponding authorHale Kaynak can be contacted at: [email protected]

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