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Rotman Insights Hub | University of Toronto - Rotman School of Management

Want a good supply chain? In some cases, it's all about who you know

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Ron Shalev

If you’re a supplier who has personal connections to a potential customer, you might have an advantage over your competitors.

In a recent study published in Review of Accounting Studies, professor Ron Shalev and his American colleagues Ting Chen, Hagit Levy and Xiumin Martin found that customers are more likely to choose a vendor to be their supplier when their C-level executives, particularly COOs, are personally connected, leading to an overall smoother process that is less cumbersome and less expensive to manage.

The researchers found the link when comparing two separate databases — one containing information on C-level executives that included their educational and prior work, and another that revealed information about suppliers’ sales to major customers between 2000 and 2011. They discovered that suppliers’ and customers’ executives who attended school or worked together in the past were more likely to do business together in their current executive roles.

“There was some empirical work to do to match them, but it was pretty standard and straightforward,” says Shalev.

In their research, Shalev and his colleagues found that these personal connections are useful because they are associated with less restrictive procurement contracts to suppliers, and ultimately, customer operating efficiency is improved. Personal connections may help reduce transaction costs in supplier selection, as well as information asymmetries between supply chain partners. Additionally, having personal connections mean both parties are more inclined to trust each other, they can communicate more openly, and they can coordinate and collaborate which offers mutual benefits to both parties.

While personal connections can offer great advantages, Shalev says there are specific situations where personal connections can be detrimental to a customer.

Shalev says there are some natural safeguards to these connections. Executives at for-profit, publicly-traded companies will often work in the best interests of the firm and won’t make decisions that will hurt its financial outcome 

“Executives in for-profit organization are often compensated based on firm performance, such as through bonuses or firm stocks and options. Therefore, they are less likely to help their friends if those actions have negative consequences on the firm and thus to the executive,” says Shalev.

But he says personal connections can be detrimental in situations where the customer does not have a vested interest with their organization, for example governmental agencies where the customer’s executive is not likely to be compensated based on the performance of the organization.

“To the best of my knowledge, government organizations typically have an internal auditor to safeguard against currying favors. But the effectiveness can vary,” says Shalev.

Shalev cautions that stronger relationships wouldn’t have solved the current world supply chain challenges — but having personal connections could have made customers more prepared for the crisis.

For example, he says if a customer has personal connections to a vendor in a foreign country, the stronger communication ties between the two can provide a deeper understanding of issues on-the-ground — such as impending war — which can better prepare a customer for disruptions in the supply chain.

“If you have a personal connection with a Chinese executive with a Chinese supplier, for example, and this executives is informed, he may give you insight on potential supply disturbances so you can prepare yourself,” he explains. “The fundamental issues with the supply chain wouldn’t change, but the firm might be able to respond much quicker, if they have a personal connection that informed them of the coming problem.”

There are limits, of course, he says. For example, it’s not always possible for suppliers to alert customers about disruptions in the supply chain ahead of time. He adds that in many cases the supplier may be only vendor of a certain raw material or a dominant one, so replacing its capacity is not always possible.

Supply, chains can also be integrated in such a way that switching a supplier is very costly.

“In the context of a war, I do not believe that knowing it is coming two months in advance would have made any difference,” Shalev says.

When it comes to nearshoring — or bringing supplier partnerships back to home countries rather than outsourcing — Shalev says that there could be an opportunity for local suppliers to create personal connections and sell themselves as the better partner “as long as they can deliver.”

But he adds that local suppliers already have an advantage over international suppliers, even if there are no personal connections. He says that when he previously worked as a CFO, he preferred dealing with suppliers closer to home.

“Local suppliers have an inherent advantage over international suppliers, because customers are facing much less information asymmetry dealing with them. There is less distance which typically means shorter and less volatile delivery times. Local suppliers enjoy certain inherent advantages when customers are sourcing for suppliers,” Shalev explains.

But Shalev reminds suppliers there is no need to fret if they are not as personally connected as their competitors are, because many other factors go into making a business decision.

“Our paper is not coming out and saying that if you don’t have the personal connections, you can’t win the business,” he says. “You win the business, primarily based on your product, based on your delivery, and based on your price. However, when all those are close between two or more competitors, personal connections and what they bring to the table in terms of trust and reduction in information asymmetries can be a decisive factor.”

Ron Shalev is an associate professor of accounting in the department of management at the University of Toronto Scarborough, with a cross-appointment to the accounting area at Rotman