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Supply Chain Management: An International Journal
An enactment theory model of supplier financial disruption risk mitigation
Marcos Paulo Valadares de Oliveira, Robert Handfield,
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Marcos Paulo Valadares de Oliveira, Robert Handfield, (2017) "An enactment theory model of supplier financial disruption
risk mitigation", Supply Chain Management: An International Journal, Vol. 22 Issue: 5, pp.442-457, https://doi.org/10.1108/
SCM-03-2017-0121
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An enactment theory model of supplier
financial disruption risk mitigation
Marcos Paulo Valadares de Oliveira
Departamento de Administração, Universidade Federal do Espirito Santo, Vitória, Brazil, and
Robert Handfield
Department of Business Management, North Carolina State University, Raleigh, North Carolina, USA
Abstract
Purpose –The purpose of this study is to examine supplier financial risk through the lens of Enactment Theory, to explore the role of transparency
and communication on buyers’perceptions of supplier default risk. The authors develop a theoretical model proposing that buyer communication
with suppliers leads to preemptive actions that may prevent supplier financial default and fewer supply disruptions. The results suggest that
reducing equivocality in buyers through communication with suppliers leads to understanding of financial factors not captured through third-party
financial indicators, leading to proactive risk mitigation activities that prevent disruptions during recessionary economic cycles. This research
proposes that transparency and communication reduces equivocality in buyers, spurring them to take contractual actions that reduces, financial
default in key suppliers, which leads to fewer supply disruptions.
Design/methodology/approach –Survey data collected from 175 firms in the North America and Brazil during a period of the global recession is
used to test the impact of communication with suppliers on supply chain disruptions in periods of economic crisis. This relationship is mediated by
proactive contract renegotiation and supplier financial health, supporting a model grounded in Enactment Theory.
Findings –Results show that buyers who regularly assess and develop an understanding of their key suppliers’financial conditions are more likely
to re-negotiate contracts that revise payment terms, leading to improved supplier working capital and fewer supply chain disruptions.
Research limitations/implications –Validation of industry-specificfinancial ratios and figures could provide a richer set of insights and some
quantitative measures for establishing baseline on what levels of financial ratios actually result in disruptions. However, future research should
consider using a cross-sectional sample and, in addition, a qualitative approach to capture risk from a greater variety of industries and supply chain
dynamics.
Originality/value –The notion of effective communication flowsasameansforreductionofsupplier disruption risk is aligned with Enactment Theory
views that emphasize the benefits of risk reduction. Equivocality is reduced in buyers through information exchange and formal assessments in complex
environments. This research suggests that while such communication does not have a direct effect on supply disruption risk, it is mediated through
proactive buyer actions to improve supplier financial health and contract re-negotiation mechanisms that may preempt financial distress. These are
important lessons learned that provide guidelines for supply chain executives in future economic recessions that may occur in the coming years.
Keywords Contracts, Social exchange theory, Supply chain disruptions, Supplier–manufacturer relationships
Paper type Research paper
Introduction
Supply disruption risk (SDR) refers to the deterioration and/or
cessation of supplier performance, influencing enterprise
performance across multiple industries, negatively impacting
share price, financial returns and operational performance
(Blackhurst et al.,2005;Craighead et al., 2007;Hendricks and
Singhal,2003, 2009). SDR has become magnified as more
organizations expand their global supply chain networks
(Zsidisin and Wagner, 2010), are exposed to price and
commodity risk (Fischl et al., 2014) and are required to have
local content requirements that drives sourcing from (often
financially unstable) local suppliers in emerging markets
(Handfield and Krause, 1999). These conditions have
escalated enterprise exposure to greater financial risks and
probability of supply disruption (Handfield et al.,2013;Jüttner,
2005;Peck, 2005). Global expansion of supplier networks
requires real-time monitoring of risk indications (e.g.
transparency technologies, block chain) for rapidly changing,
continuously expanding and often unpredictable business
conditions (Ellis et al.,2011;Manuj and Sahin, 2011;
Handfield and Linton, 2017). Recent studies show that there
are significant differences among firms in terms of how
information about distressed suppliers are scanned and
interpreted, how responses are devised and how firms learn
(Bode and Wagner, 2012).
Supply chain executives recognize supply disruption as a
threat to performance (Pournader et al.,2016;Stroud, 2013)
but there is a call for more research on behavioral perceptions of
The current issue and full text archive of this journal is available on
Emerald Insight at: www.emeraldinsight.com/1359-8546.htm
Supply Chain Management: An International Journal
22/5 (2017) 442–457
© Emerald Publishing Limited [ISSN 1359-8546]
[DOI 10.1108/SCM-03-2017-0121]
Received 26 March 2017
Revised 24 June 2017
6 July 2017
Accepted 7 July 2017
442
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risk, particularly around learning, scanning, interpretation and
action (Bode and Wagner, 2012). Craighead et al. (2007)
present a general framework that synthesizes multiple facets of
decision-making involved in managing SDR. Other research
identifies many forms of perceived supply risks including
human resource issues, complexity of supply chains, strategic
alignment of suppliers, performance measures, environment
and financial issues (Christopher et al., 2011;Ellis et al., 2011;
Hendricks and Singhal, 2009;Pournader et al., 2016;Shi and
Handfield, 2012;Wagner and Johnson, 2004;Zsidisin, 2003;
Zsidisin and Wagner, 2010). Of these components, financial
default is responsible for about 10-20 per cent of all supply
disruptions (Handfield and McCormack, 2008;Salonen,
2010). During the global economic recession of 2008, many
buyers assumed that suppliers were not at risk. During this
crisis, many buyers imposed longer payment terms on suppliers
despite a shortage of commercial liquidity in the financial
sector, forcing suppliers to discontinue operations due to a
shortage of working capital (Handfield, 2011). Working capital
refers to the ability of an enterprise to meet its short-term
payment obligations to employees and suppliers.
In seeking an explanation for how buyers downplayed the
financial risks of their key suppliers during this period, we
propose a framework grounded in Enactment Theory to
explain how managers behave during a period of economic
volatility, impacting multiple echelons of industrial supply
chains. In a wide-ranging study of SDR, Ellis et al. (2011)
found that that risk drivers, consequences of risk, risk
mitigation tactics and risk assessment metrics comprise
important elements in understanding managerial responses to
supplier risk. Relying on Ellis et al. (2011) and prior work by
Weick (2001) on managerial sense-making in complex
environments, we examine the relationship of buyer behavior to
risk indications in a period of drastic economic contagion.
Our model employs Enactment Theory, and is motivated by
Weick (2001) and Ellis et al. (2011), specific to the context of
supplier financial distress. Our research contributes to our
knowledge of how buyers perceive risk during periods of global
economic risk, and suggests that improved perception of risks
takes place through open communication, leading to improved
understanding of supplier financial status and actions to
proactively alter contractual terms, which in turn mitigates
potential disruptions to supply chain performance. The
theoretical model is tested using a sample of North American
and Brazilian supply management executives, allowing us to
compare respondents from both regions during the global
economic crisis of 2008. The unique timing of the sampling
frame yields insights on how managers perceive supplier
financial risk in periods of economic volatility and contagion. It
is motivated by statements such as these:
monitoring and auditing suppliers, may not either provide sufficient
information about risks from suppliers, or at least the ability to make
appropriate adjustments to avoid disruption occurrence in a timely manner.
(Zsidisin and Wagner, 2010, p. 14)
Prior research suggests that bounded rationality may restrict a
supply management professional’s ability to examine the
likelihood of supply disruption occurrence stemming from
supply-side risk sources (Carter et al., 2007). This post hoc
study is due in part to the lag in recognition of the effects of the
recession on the global supply chain. (In Brazil, these effects
were still being felt in 2017).
The research begins with a discussion of Enactment Theory,
the theoretical model, research design and results, and
concludes with a discussion of how buyer perceptions ofrisk are
mitigated through improved communication. We also discuss
future research in the behavioral responses of buyers to the
threat of financial supplier disruption risk.
Literature review
Enactment theory
Enactment Theory provides a rich contextual background to
frame the discussion of buyer perceptions of supplier disruption
risk. Enactment Theory proposes that psychological and social
processes determine how individuals and organizations derive
meaning, or “make sense”from their experiences and
indicators (Weick, 1969,1995,2001). Sense-making is a
“closed-loop process comprised of enactment (actions based
on previous understanding), selection (interpretation of events)
and retention (causal maps) that enable individuals to resolve
equivocality”(Ellis et al., 2011,p.82).Weick (2001) defines
equivocality as the extent to which multiple meanings are
linked with a situation, whereby those meanings and
explanations are subject to infinite revision and ambiguity. In
the context of buyers, actions to support suppliers (enactment)
are proposed to be a function of information gleaned from
discussions with suppliers (selection) and understanding of the
depth of their financial problems (retention).
Equivocality arises when multiple derived meanings are
attached to perceived indicators of environmental conditions
that are subject to revisions as events unfold (Weick, 2001).
Enactment Theory applied to SDR by Ellis et al. (2011)
suggests that the socio-psychological sense-making processes
underlie the formation of buyers’perceptions of supplier risks.
Buyers’actions to mitigate supplier risks is a function of how
well they comprehend the perils associated with economic
contagion in the supply base. Enactment Theory suggests that a
buyer’s decision to act in the presence of supplier risk is an
idiosyncratically satisfying rather than rationally optimizing
activity. Moreover, buyers’equivocality reduction processes
can be encouraged by promoting accurate views of the
environment (communication with suppliers [CS]) (Ellis et al.,
2011;Zsidisin and Wagner, 2010). This view is embodied in
our research model, and further explained in the context of the
2008 global economic crisis.
For managers to make sense out of different signals in
equivocal situations requires effective communication and
interconnectivity with others in their environment. Intelligence
is a process of interconnectivity (Taylor and Van Every, 2000,
p. 213), or what Weick describes as “heedful interrelating”.A
collective mind emerges as a capacity in an on-going activity
stream when activities among people are tied together as
contributions that are subordinated to a joint system (Weick
and Roberts, 1993). An inability to make such connections in
periods of high uncertainty can be disastrous. Weick (2001)
notes that an example of “less heedful interrelating”is Winston
Churchill’s reconstruction of why he failed to see that
Singapore was vulnerable to land invasion in the Second World
War. A good illustration of the awareness of multiple causality
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may be found in Churchill’s response to his horrified discovery
that Singapore, rather than being impregnable, proved to be
highly vulnerable to a Japanese land invasion (Allinson, 1993).
Churchill noted afterward that “I ought to have known. My
advisors ought to have known and I ought to have been told,
and I ought to have asked”. These four lapses are lapses of
interconnection in gathering information about unexpected
events (Weick, 2001).
The sense-making context is helpful in explaining why
supply managers seemingly faced with the same nominal SDR
act in such different manners (in Figure 1 vs 2). (These two
figures were derived in discussions with executives during the
initial stages of survey pre-testing and development, described
later.) Ellis et al. (2011) propose that equivocality in the face of
imminent risk can be reduced through an “internal cognitive
constraint”(Barley and Tolbert, 1997). The constraint is
composed of “structures that constrain sense-making by
making some actions unimaginable and others self-evident”
(Weber and Glynn, 2006, p. 1641). These structures in turn
act to shape what people say and do when confronted by
supplier risk indicators. But the question remains: What drove
some buyers to act when confronted by the 2008 recession
risks? What pushed some buyers (but not others) to engage in a
dialogue with suppliers, and then commit to help these
suppliers with survival strategies to maintain operations
through the crisis?
Prior research suggests that buyers generally have direct
communication with supplier sales account managers, and are
thus most likely to be able to detect signals of supplier risk that
may manifest themselves into supply disruptions (Zsidisin and
Wagner, 2010). During the period of the global recession, there
were few third-party risk assessments tools that assessed the
degree of supplier risk (e.g. audits, network analyses and
process analysis) (Bode and Wagner, 2012;Zsidisin and
Wagner, 2010) despite a high level of media attention on the
crisis. Indeed, interpretation of supplier distress signals has
been characterized as a “dynamic hypothesis test in a changing
environment”by researchers (Bode and Wagner, 2012, p. 35).
A high trust level can increase the clearness of the signals. But
actions affect commitment through their effects on beliefs
(Salancik, 1977). Commitment in turn can be defined “as a
willingness to persist in a course of action”despite the obstacles
(Cooper-Hakim and Viswesvaran, 2005, p. 241). In comparing
Figure 1 with Figure 2, it is evident why buyers who
communicated with their key suppliers quickly learned they
were experiencing financial difficulties. This seems overly
simply, yet our research suggests that buyers simply assumed
their suppliers would be able to “tough it out”through the
difficult economicenvironment (as in Figure 1).
What led some buyers to take action while others did not do
so during the 2008 period? Research suggests that a variety of
factors exist in explaining differences in behavior, including the
diversity of structures that constrain sense-making, the level of
equivocality inherent in the supply environment and the
organizational and individual factors that affect the equivocality
resolution process (Hertzel et al., 2008;Hofler, 2009). This
applied cognitive approach to enactment forms the foundation
for our study, which sought to provide insights into how buyers
reacted differently in pursuing insights into their suppliers’
financial condition.
Research on SDR employs several different theories and
constructs across disparate studies, and an emerging body of
theory suggests that transparency and communication can
reduce equivocality when buyers seek to make sense of signals
of supplier risk (Bode and Wagner, 2012;Carter et al., 2007;
Zsidisin and Wagner, 2010). An explanatory model was
constructed and quantitatively tested to relate the cognitive
dissonance on the part of supplier managers during the 2008-
2009 global economic crisis, and the reaction of supply
managers faced with critical suppliers experiencing the onset of
harsh financial distress.
Mitigating financial supplier disruption risk
Supplier Disruption Risk (SDR) is defined as the probability of
an incident associated with inbound supply from individual
supplier failures or the supply market, which results in the
inability of the purchasing firm to meet customer demand
(Zsidisin, 2003). Research suggests that SDR is a multi-faceted
concept, and as such, has significant cognitive and behavioral
elements associated with how managers perceive and manage
risk (Ellis et al.,2010;Zsidisin, 2003). The psychological and
social underpinnings of SDR are in a nascent stage of
Figure 1 Cognitive dissonance
Figure 2 Open communication
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development (Ellis et al.,2011), and the application of
Enactment Theory provides a useful approach for
understanding SDR.
Supplier bankruptcy filings are one of the most egregious
indicators of supply chain risk. Prior research has found that
contagion effects occur prior to suppliers bankruptcy filings,
extending beyond industry competitors along the supply chain,
as pre-filing distress often results in actions and indicators that
have direct consequences for rivals, customers and suppliers
(Hertzel et al., 2008). Using bankruptcy data between 1978
and 2004 from Bankruptcy DataSource Index, financial
researchers found that in a sample of 95 Chapter 11 filings, less
than 30 per cent survived (including those who were not
merged or acquired) (Hertzel et al.,2008). However, historical
reviews documenting the 2008-2009 financial crisis, such as
“Too Big to Fail”(Sorkin, 2010), suggest that the environment
was historically unparalleled in terms of the number of global
industries that were impacted by the crisis, with sudden
supplier economic contagion across many industries. There
was no precedent for the sudden economic contagion that took
place during this period, and little research on this subject.
Supplier financial default is one of the prevailing forms of
SDR in the global supply chain (Bode and Wagner, 2012;
Wagner et al., 2009;Wagner and Johnson, 2004). Financial
theory explores financial contagion in terms of investor
reactions that learn of a single firm’s default, and their resulting
awareness of probable contagion of closely associated business
partner firms. Investor updates leads to “contagious”jumps in
credit spreads of business partners, and can rapidly spread
defaults across an entire sector (Giesecke,2004, 2006).
The common ex ante strategy for many supplier managers to
safeguard against the consequences of a sudden financial
default of a supplier is to diversify or install redundancy in the
supply base (Anupindi and Akella, 1993;Tang, 2006;Wagner
et al.,2009). Other approaches include the integration of
contingent sources of supply (Kleindorfer and Saad, 2009;
Monczka et al., 2011), inventory buffers (Elmaghraby, 2000),
substituting suppliers (Swinney and Netessine, 2009)orrisk
reduction through alternative contracting mechanisms (Parlar
and Perry, 1996). However, all of these actions involve
decisions that are post hoc, given conditions of high
equivocality of supplier financial risk. These actions are also
made more complicated during a period of financial contagion,
as risk mitigation cannot be isolated to a single supplier given
that default dependencies amongst suppliers are often
concurrent in nature (Wagner et al.,2009). During periods of
global deleveraging and economic distress, risk mitigation
strategies involving redundancy and diversification are
ineffective if conditions of default supplier dependencies in the
portfolio are present (Zsidisin and Wagner, 2010). A wide
variety of possible actions may exist depending on whether
buying firms are proactive in their interpretation of risk (Bode
and Wagner, 2012). High levels of uncertainty, complexity,
dynamism and interdependence in the supply base is proposed
to escalate equivocality within the SDR decision-making
environment (Ellis et al.,2011). Faced with previously
unknown indicators in an uncertain environment, “people
often don’t know what is the ‘appropriate action’until they take
some action and see what happens”(Weick, 2001, p. 225). In
the following section, we introduce hypotheses that underlie
our model of supplier risk perceptions and how buyers who
acted mitigated their suppliers’financial risk.
Hypothesis development
Financial supplier disruption risk
We adopt the concepts of Enactment Theory to the case of
buyers who failed to recognize imminent disaster in their supply
base during the 2008 global economic recession, developed
through interviews and embodied in Figure 1. During the early
stages of this recession, the sudden drop in global gross
domestic product (GDP) resulted in canceled customer orders
and Fortune 500 companies faced massive unexpected drops in
revenue. Many buyers for these large companies naively
assumed that their Tier 1 suppliers were not facing the same
economic difficulties. Reports show that not only did these
buyers discount the risk of suppliers facing the same revenue
drops as they canceled orders to suppliers, but their payment
terms on existing orders were lengthened to 90 days or more
during this period (Aeppel, 2008;Milne, 2009). Suppliers to
the Fortune 500 companies were unable to find short-term
loans to finance on-going operations due to a lack of
commercial liquidity across the global financial system. In
retrospect, buyers did not recognize the plight of their
suppliers, and, like Churchill, were not attentive to the systems
for gathering information on the impact of the recession on
suppliers’financial health. In fact, some senior executives at
Fortune 500 companies began imposing even longer payment
terms beyond 90 days for their weakened supply base (Salonen,
2010). As these smaller suppliers’financial health quickly
deteriorated, supply disruptions proliferated, workers were laid
off, operations shut down and existing orders canceled,
followed by bankruptcies (Handfield, 2011;Milne, 2009;
Wagner et al., 2009). Many suppliers said nothing until it was
too late and banks had shuttered their business, fearful that
buyers would cut them off if they knew how bad their situation
was. Such relational resistors were in fact driving structural
disruptions (Wagner and Fearne, 2015).
A handful of buyers at Fortune 500 companies did not react
in this manner. As shown in Figure 2, some buyers recognized
the peril that the economic recession might be causing for
suppliers, and developed channels of communication to assess
the impact on their operations (Handfield, 2011). An
important difference in Figure 2 is that buyers who effectively
approached suppliers in a spirit of transparency were more
likely to encourage suppliers to disclose that they were
experiencing problems. Prior research suggests that buyers who
set the right tone for these communications can build trust
leading to more open disclosures on the part of suppliers (Bode
and Wagner, 2012;Handfield and Linton, 2017;Handfield
et al.,2000;Zsidisin and Wagner, 2010).
Research suggests that a direct exchange of information
between buyers and sellers leads to fewer supply disruptions
(Zsidisin and Wagner, 2010). Perceptions of risk indicators are:
[...] based on how information on the source of a risk is communicated, the
psychological mechanisms for processing uncertainty, and earlier experience
of danger. This mental process results in perceived risk: a collection of
notions from which people form their own risk sources relative to the
information available to them and their basic common sense. (Renn, 2004)
Due to the inherent ambiguity and uncertainty of
conceptualizing risk, different concepts of risk compete with
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one other and are based on buyer-specific rationales (Wagner
and Fearne, 2015).
Direct buyer communications serve to reduce equivocality
regarding a supplier’sfinancial condition, through collection of
information that is then translated, interpreted and acted on
(Weick, 2001). Financial models of SDR state that “the
disclosure of information matters a lot: increased transparency
reduces the likelihood of contagion effects due to incomplete
information”(Giesecke, 2004, p. 1541). We state the
relationship as H1 represented in Figure 3:
H1. Increased Buyer–Supplier Communication leads to
lower supply disruption risk (SDR).
Prior studies of supplier financial challenges suggest that the
primary sources of financial supplier disruption risk were due to
lack of working capital brought on by shortages of commercial
paper and extension of payment terms (Handfield, 2011;
Resende et al.,2009). Working capital refers to the ability of an
enterprise to meet its short-term payment obligations to
employees and suppliers. In many cases, the root cause of
financial distress was not well understood by buyers until an
actual conversation had taken place with specific supplier
executives. Financial indicators such as D&B and Moody’s
were not capturing current conditions, and suppliers were not
willing to come forward and openly share their problems with
buyers for fear of losing business. Buyers who approached
suppliers in a spirit of transparency and trust were more likely
to hear the full story (Handfield, 2011). A shortage of working
capital can quickly shut down operations, as a supplier cannot
pay employees or buy materials. In such cases, a number of
options can solve the problem, including improved payment
terms from buyers, factored payments, access to commercial
lending or even short-term loans that prevent supplier
operations from shutting down (Bode and Wagner, 2012;
Handfield, 2011;Wagner et al.,2009):
H1a. Buyer awareness of supplier financial health (SFH)
mediates the relationship between increased
communication and lower supplier disruption risk.
Higher levels of open information exchange between buyers
and sellers can shed light not only on a supplier’sfinancial
health, but also to issue resolution through collaborative
problem-solving (Cousins et al., 2006;Dyer and Nobeoka,
2000). Enactment Theory recognizes the role of the
individual’s innate preference for social versus independent
action, which involves “tolerance, trust, and non-contractual
cooperation”(Weick, 2001, p. 213). As a preference for
communal behavior increases, individuals become more
tolerant and receptive to the reality of a situation, and a
preference for a shared understanding follows. In the context of
our scenario, buyers who fully grasped the supplier’s working
capital shortfalls acted immediately to facilitate contract re-
negotiations that eased financial distress. Examples of such
contractual mechanisms include more favorable terms of
payment (30 days or less), discount terms (e.g. 2/10 net 30),
reduced inventory holding requirements, shifting of
transportation responsibility, resolving blocked purchase
orders and other factors that impeded the flow of working
capital to suppliers. In short, while open communication is
important, our model as depicted in Figure 3 proposes that
action in the form of renewed contract terms in the face of new
information is a necessity to de-risk the supply base, modeled
here as a mediating activity. This is particularly true given the
sudden nature of the global economic recession:
H1b. Proactive contract renegotiation (PCR) mediates the
relationship between communication and lower
supplier disruption risk.
The idea that default contagion occurs across a network of
firms in the same industry is rooted in the financial literature
(Giesecke,2004, 2006), but has a precedent in the automotive
and electronic industries. Astute buyers with strong cash flows
are in a better position to leverage cash meaningfully to act as a
proxy “financial stabilizer”for their suppliers. For instance,
General Electric and Dell have financed supplier early
payments and made this a profitable extension of their core
business (Handfield, 2011). Financially stable firms are better
equipped to proactively engage with key suppliers to assist with
working capital, particularly in periods of economic duress.
Larger firms have access to better commercial terms for
financing debt relative to suppliers, who are often smaller and
subject to higher capital charges (Handfield, 2011;Wagner
et al.,2009). Supplier disruptions in turn reduce supply chain
flexibility, and a single critical nodal disruption may have ripple
effects throughout the supply network (Sheffiand Rice, 2005;
Zsidisin, 2003). A bankruptcy or performance disruption at a
single supplier is rarely isolated to a singular node, and often
impacts multiple suppliers and buyers in the network (Choi
et al.,2002;Wagner et al.,2009).
Enactment Theory suggests that buyer’s perceptions of a
given supplier’sfinancial and performance disruption risk are
ideally clarified through open dialogue, leading to validation of
perceptions and a more objective reality of the impact on the
broader environment (Ellis et al.,2011;Weick, 2001). We
propose that buyers in financially stable enterprises who
communicate have more resources to assess SFH, which leads
to fewer supplier disruptions. As buyers’understanding of how
dependent they are on suppliers combined with insights into
supplier financial challenges, some developed “an innate
Figure 3 Research model
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preference for social versus independent action”, which “is
about tolerance, trust, and non-contractual cooperation”
(Weick, 2001, p. 213). Sense-making drove some buyers to
become more tolerantand receptive to the notion that suppliers
were facing a high risk of bankruptcy, and in some cases led to
actions that go beyond traditional contract terms and
conditions. For instance, one executive at a large Fortune 500
company noted:
We had to wake up and support our key partners in this environment. We
became focused on discussions on how to mitigate risks and make our
procurement teams aware of those risks in the current environment.
(Handfield, 2011)
We thus propose that:
H2. Financially stable buyers improves suppliers’financial
health.
As noted earlier, the lens of Enactment Theory suggests that
the sense-making process led to action in the form of proactive
decisions to re-negotiate contracts as buyers act through
organizational structures, systems and controls that facilitate
equivocality reduction, which in turns leads to a richer mental
representation of the supply environment (Ellis et al., 2011;
Weick, 2001).
The theoretical model embodying these hypotheses is
depicted in Figure 3.
The research model supports the idea of reciprocal
enactment based on perceptions of the supply environment,
leading to direct communal action in the form of proactive
contract negotiations and reduced supplier financial distress.
These antecedents are posited to reduce supplier disruption
risks. In the next section, the research method and
measurement development are presented.
Research method and measure development
The research design sought insights into key issues related to
managing supplier financial stress and the impact on
subsequent SDRs. Despite established supply management
research acknowledging the importance of financial health as a
component of supplier evaluation (Monczka et al., 2011), this
issue became a disruptive force during the global economic
crisis initiated in 2008.
Survey instrument design
The research model posits that buyer equivocality is influenced
through improved communication with suppliers (CS), leading
to proactive contract renegotiation (PCR), improved supplier
financial health (SFH) and reduced supply risk. In this context,
the unit of analysis is the supply manager (or “buyer”)atfirms
surveyed in the study, who were asked to share their
perceptions of their firm’sfinancial stability, their supplier’s
financial health, the actions they had taken in response on their
part, the CS and the resulting level of supply disruption being
experienced. A survey of supply managers was deemed as the
appropriate vehicle for data collection to test the model. These
supply managers were asked to assess the general condition of
relationships with “critical”suppliers, as well as the current
condition of their financial status. (Note that not all suppliers
were deemed to be critical, as non-critical suppliers are often
monitored much less).
Multiple discussions with executives in various industries,
coupled with secondary research in the press, resulted in the
development of a set of questions that focused on the predicted
events and responses that organizations might face in the short
term and over the next two years. The survey assessed issues
related to financial health of both buyers and suppliers,
communication practices with suppliers, contract adaptability
and financial supplier disruption risk.
A number of prior works develop various measures for
assessing supplier financial risk. However, each of these
measures is somewhat unique and does not apply exactly to the
specific context identified in this research. For instance, prior
measures examine the role of price risk attributable to
commodity prices (Fischl et al.,2014), financial health due to
pricing pressure (Zsidisin, 2003) or currency exchange risks
(Chopra and Sodhi, 2004). None of these measures specifically
address the overall financial health of suppliers due to
economic contagion across an industry, leading to sudden
drops in revenue and lack of access to working capital. We
therefore derived measures for the buying company’sfinancial
health to assess the level of preparedness of the respondent’s
firm to withstand an economic downturn. For SFH, on the
other hand, we measured the buyers’perception of their
supplier’sfinancial health in terms of their preparedness to
withstand an economic downturn, and whether they were
requesting early payments from buyers. The latter factor was
identified as a critical indicator of financial problems in
suppliers based on interviews we conducted during this period,
and differs from prior measures of financial risk. Two items
were used, one for large and one for small/medium suppliers, as
each of these types of suppliers might face different economic
challenges. These metrics are aligned with our thesis regarding
Enactment Theory, and whether buyer perceptions of supplier
health led to actions and/or subsequent failures or disruptions.
To measure the level of CS, respondents were asked to rate
how frequently companies communicate with their suppliers to
update current financial status and also to plan how possibly
they would respond in the event of supply chain’sfinancial
disruption. The PCR construct sought to identify whether the
buyer in question was actively re-negotiating contracts with
suppliers, by reviewing and strengthening contractual payment
terms to drive compliance, share mutual risks and rewards and
modify payment timeframes to help the supplier to avoid cash/
flow problems. These actions serve to help establish a
commitment to a long-term relationship beyond the immediate
economic distressful period.
The endogenous construct of SDR sought to identify the
buyers’risk exposure by accessing whether suppliers are
currently experiencing financial problems or are showing signs
that their normal operations could be disrupted. Our interviews
with buyers suggested that the typical signs of distress included
difficulty obtaining short-term credit, pricing increases to
buyers, erratic deliveries and putting on hold all future capacity
expansion projects.
Pilot testing phase
The survey was pilot tested in two steps. The draft
questionnaire was first sent to six subject matter academics in
the area, who were asked to comment on the content, clarity
and scaling of the instruments. Several minor changes resulted
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which involved rephrasing some of the items to clarify their
meaning and content. The survey was then submitted to nine
industry executives that completed the questions online, and
who were asked to provide feedback on the content, design and
usability of the instrument. Phone interviews were also
conducted with these industry experts to ensure their remarks
and implications were captured. The industries piloted
included life sciences (2), financial services (2), oil and gas (2),
automotive (1) and industrial manufacturing (2). A number of
design changes were made at this stage to refine the questions
and ensure that the wording was consistent with the key themes
discussed in the interviews, keeping all questions but reordering
and adjusting the survey format to make the data collection
instrument more user friendly. Our initial discussions found
that some buyers were indeed open to exploring their suppliers’
financial status, but others felt that it was not their
responsibility, and that it was “every man for himself”,
consistent with our model development. The survey was
translated into Portuguese for the Brazilian firms sample, and
back translated to ensure that the English and Portuguese
versions were equivalent.
The measures developed for the survey (shown in
Appendix 1) were considered as reflective by representing
effects or manifestations of the respective underlying constructs
(Hair et al., 2014).
Data collection
The data were collected through a web-based survey of mid-
and upper-level supply managers at North American and
Brazilian enterprises. Respondents were asked to answer the
survey questions by considering all responses in the context of
their own enterprise and key suppliers in the supply base. We
also randomly identified a group of five respondents from each
country who were selected for further interviews to lend
insights into the results during this period. Selected extracts
from these interviews have been used in the discussion section
of the paper to augment explication of the results.
Sample characteristics
The study was supported by Fundação Dom Cabral in Brazil,
the Supply Chain Resource Cooperative and the International
Association of Commercial and Contract Managers (a global
organization). Efforts to enhance the response rate were carried
out using two approaches (Forza, 2002). First, a follow-up
email was sent to the managers within the sample two weeks
after the initial mailing. Second, the respondent firms were
offered the incentive of a composite summary of the results.
A total of 216 responses were obtained with responses across
a wide number of industries. Surveys were conducted via an
online survey, and were sent to mailing lists from the Institute
for Supply Management, the International Association of
Commercial and Contract Management, the Supply Chain
Resource Cooperative at NC State University and executives
participating in seminars at FDC University in Brazil. The
response rate across these different parties was approximately
21.6 per cent of 1,000 surveys sent. All responses that had items
missing on any of the variables were deleted. This was done to
ensure the database consistency, leaving 176 useable responses.
Participants included vice presidents, senior buyers, managers
and directors. A third were large Fortune 500 companies
(>$5bn), the remainder of various sizes. Results were compiled
to compare data across these groups, with key themes
identified.
After removing one outlier, the final sample of 175
respondents was composed by 106 companies (60.5 per cent)
located in Brazil, 57 (32.6 per cent) in the USA and 12 (6.9
per cent) located in Canada. Initially the data set was examined
for equivalence, i.e. if North Americans and Brazilian
respondents interpreted and/or responded to questions in the
same way, since ignoring equivalence issues can lead to
ambiguous or erroneous conclusions (Knoppen et al.,2015).
The partial least squares multi-group analysis (PLS MGA) test
was conducted following the recommendations of Knoppen
et al. (2015) to test configural, metric and scalar equivalence.
PLS-MGA, an extension of the original Henseler et al.’s(2009)
MGA method, showed no equivalence problems between
groups. Configuration equivalence was checked with all
indicators loading significantly on the same factors across
groups. In the same manner, the metric equivalence test
showed no statistical difference on factor loadings across
groups with all p-values between the range of 0.05-0.95
(Sarstedt et al.,2011).
Approximately 25 per cent of firms had revenue over $1bn,
21 per cent from $251m to $1bn, 19 per cent $50m to $250m
and 20 per cent less than $50m, and were either OEM or Tier 1
suppliers to Fortune 500 companies. The remainder did not
provide details on sales revenue. Several industries were
represented at the sample across industrial, distribution, life
sciences and energy firms, with 144 companies from the
consumer goods/products industry.
The response by position was vice president/director (14
per cent), senior manager (57 per cent) and junior manager (29
per cent). By functional area of responsibility, purchasing
returned the greatest number of responses (89.9 per cent), with
the remainder composed of R&D and manufacturing managers
familiar with suppliers. No significant mean differences were
detected between either of these groups. The average
experience in the industry was 9.06 years, providing support
that research informants were knowledgeable about the issues
under investigation.
As this study relied on single respondents and perceptual
scales to measure variables, we assessed the presence of
common method variance. Common method variance refers to
variance caused by measurement methods, threatening the
validity of empirical findings and misleading the interpretation
of the results (Podsakoff et al., 2003). We performed Harman’s
single-factor test to check whether common method bias exists.
After submitting the raw data to an exploratory factor analysis,
we inspected the un-rotated factor solutions, and eight factors
were identified using Eigen-values with a cutoff point of 1.0,
with the first factor explaining 30.6 per cent of the variance. In
addition, the marker-variable test was conducted by taking the
smallest correlation among the manifest variables as a proxy for
CMV (Malhotra et al., 2006). Comparing the results of the
uncorrected estimates with the adjusted estimates the
differences were relatively small, leading us to conclude that
common method variance was not a significant concern in the
sample.
Tests for non-response bias were carried out by comparing
early respondents (responses received within the first two
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weeks) and later respondents (responses received within the
third week or later) (Armstrong and Overton, 1977). A t-test of
differences was conducted on firm size (employees and sales),
and mean responses to each variable. No statistically significant
differences were identified.
Results
To evaluate the reflective measurement models, the internal
consistency reliability was initially analyzed by calculating
composite reliability as suggested by Hair et al. (2014). The
composite reliability measures for the measurement models
were considered satisfactory with scores ranging from 0.735
(SFH) to 0.899 (BFFH).
To establish convergent validity, the average variance
extracted (AVE) was computed for each construct of the model
showing that constructs were able to explain more than half of
the variance of its indicators (AVE scores were greater than
0.5). All indicators were kept after evaluating the Outer
Loadings and their statistical significance.
Discriminant validity was assessed by examining the cross
loadings of indicators (Figure A1). Results show that all
indicators’outer loadings on the associated construct were
greater than all loadings on other constructs (i.e. the cross
loadings). In addition, the Fornell–Larcker criterion was used
to demonstrate that no problems with discriminant validity
existed (Table I), since the square root of the AVE values for
the constructs were greater than its highest correlation with any
other construct (Hair et al.,2014).
Following this analysis, the structural model was assessed
and hypotheses testing conducted using the SmartPLS 3
software (Ringle et al., 2014). Partial least squares structural
equation modeling (PLS SEM) was chosen since it requires no
assumptions about the data distribution. Because the
questionnaire was based on a five-point scale, detection of
normality was not relevant since ordinal scales with few scale
points increases skewness and kurtosis (Leung, 2011). PLS-
SEM results are considered good proxies for covariance based
structural equation modeling (CB-SEM) (which does require
normality) results and, therefore, deemed a good
methodological alternative for theory testing when CB-SEM
assumptions are violated (Hair et al.,2014).
To test the mediation effect of SFH and PCR, guidelines
proposed by Baron and Kenny (1986) were followed. The
results of the first analysis (Figure 4) provided support for H1
by using bootstrapping to test the direct effect between CS and
SDR without mediator variables. As the bootstrapping
procedure performs fairly robustly even when data are non-
normal, it should be used as basis for significance testing. In
bootstrapping, subsamples are randomly drawn (with
replacement) from the original set of data. Each subsample is
then used to estimate the model and test the significance of the
effects (Hair et al.,2017). Results show that the direct effect of
CS on SDR was significant (p-value <0.001) with a path
coefficient of 0.317[1].
The next step taken for the mediation analysis was to test
whether the effects of CS over both mediators (PCR and SFH)
were significant, and also whether the effects of mediators
(PCR and SFH) on supplier disruption risk (SDR) were
significant.
The results shown in Figure 5 and Table II (below) indicate
that all path coefficients were significant with the bootstrapping
test (p-values <0.05) after the insertion of both mediators
(PCR and SFH), except the direct effect from CS to SDR. As
expected, this factor was rendered insignificant (p-value =
0.489) after the inclusion of the mediating effects of SFH and
PCR. Also, the path coefficient from CS to SDR was reduced
from 0.317 to 0.059, providing further supporting evidence
that the effects of the mediators reduced the impact of this
relationship. The direct effect of Buying Firm Financial Health
(BFFH) over SFH was also shown to be significant.
Finally, it was necessary to evaluate the size of the direct
effect from CS to SDR that was absorbed by the mediators.
Evaluating the indirect effects presented in this research model,
the indirect effect of PCR (0.146) was higher than SFH (0.105)
and the total indirect effect from CS to SDR considering both
mediations together was 0.252 with a p-value <0.001. In
addition, the Variance Accounted For (VAF) was calculated by
taking the total indirect effect divided by the total indirect effect
plus the direct effect (VAF = 0.252/(0.252 10.059) = 0.81).
To summarize, with a VAF of 81 per cent it was possible to
conclude that SFH and PCR together are full mediators of CS
over SDR (Hair et al., 2014).
Table I Fornell–Larcker criterion –correlations table with square root of
the AVE in diagonal
BFFH CS PCR SDR SFH
BFFH 0.903
CS 0.113 0.868
PCR 0.041 0.602 0.795
SDR 0.015 0.301 0.358 0.691
SFH 0.163 0.224 0.186 0.487 0.704
Figure 5 Path model (H1a;H1b;H2)
Figure 4 The direct effect of CS over SDR
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Finally, to verify the behavior of the research model for country
effects, we used the Brazilian and North American samples to
conduct a multi-group analysis test. Results showed no
statistical differences of the path coefficients in comparing the
model results between the Brazilian and North American
samples. Despite minor difference in the average scores of
results between the samples, the relationships among the
constructs of the model were statistically identical when
comparing the outcome in each region.
Discussion and implications
The results of our research have some important implications
for the study of buyer–seller relationships and SDR, as well as
identifying other avenues for future research. The results
provide strong evidence supporting our model that
understanding of supplier’s economic conditions can occur
through open communication, leading to improved
understanding of supplier financial status and actions to
proactively alter contractual terms, thereby reducing potential
disruptions to supply chain performance. In a broader sense,
the model emphasizes the importance of transparency in
reducing buyer equivocality on potential risks, and suggests a
need for additional research on risks that occur as a result of
relational discontinuities between parties (Wagner and Fearne,
2015).
Communication leads to proactive measures
Supplier managers who establish regular risk-based
performance reviews with suppliers are more likely to adjust
their payment terms to improve cash flow for suppliers facing
problems (Fischl et al., 2014). Examples of communication
involve meetings to identify the impact of economic conditions
on supplier cash flow, regularly scheduled information sessions
to exchange data on a supplier’sfinancial conditions,
discussions on contingency planning and business continuity
plans in advance of downward forecasts (Handfield et al.,
2000). In addition, research is needed on emerging
technologies that provide real-time event notification through
online procure to pay systems, emerging block chain
technologies, and joint platforms for collaboration and sharing
information (Handfield and Linton, 2017).
Although over half of the companies in our sample had
regular communication with suppliers (60 per cent) and were
discussing business continuity contingency planning (53 per
cent), less than half were re-negotiating contracts (43 per cent).
Also, over a third of firms had suppliers requesting improved
payment terms, yet most buyers failed to act on these signals.
Our results support the idea that communication flows can lead
to a buyer’s improved understanding of their supply network’s
financial health (H1a), and can also lead to tangible contractual
re-negotiation activity (H1b) that can help counter the effects of
financial distress and reduce financial SDR. However, the idea
of communication as a direct impact on supplier disruptions
was not supported (H1) given the mediating effects of the other
two parameters. These results suggest that tangible actions
(sense-making followed by enactment) must accompany
communication for risk mitigation to be effective. One of the
most tangible forms of addressing financial risk is through re-
negotiation of contractual terms (Salonen, 2010;Swinney and
Netessine, 2009). Our research results suggest that the
mediation effect of Proactive Contract Negotiation was
stronger than Buyer Financial Health for the relationship
between Buyer Communication with Supplier and SDR. It
should be noted that contract re-negotiation may have required
buyers to elevate the situation to a higher level, involving
financial officers, legal counsel, accounts payable departments
and other functions. The ability to determine the terms for
payment to suppliers often goes beyond the buyer in many
companies (Monczka et al., 2011), and further research is
needed to discuss how cross-functional assessments of supplier
financial risk and resulting contract structures should be
developed.
A post hoc analysis was also conducted during this research
project, which explored the differences between buying
behaviors in the North America and Brazil (The mean
difference t-tests in responses is shown in Appendix 2).
Comparing the mean values for responses to the questions in
the “proactive contracting behavior”construct between the two
samples shows that the biggest and most significant difference
was related to adopting policy changes to supplier accounts
payable terms to accommodate cash flow problems (mean
difference = 0.735, p-value <0.001). On average, results
suggest that respondents from North America were more
hesitant to accommodate cash flow problems through changes
to accounts payable policies for suppliers. The difference in
means was also evident when it came to developing informal
agreements/MOUs that communicate a long-term agreement
(mean difference = 0.581, p<0.01) as well as the willingness to
extend contracts for a longer-term relationship (mean
difference = 0.480, p<0.02). In both cases, North American
firms were less willing to make such commitments compared to
Brazilian buying firms.
This difference between North American and Brazilian
responses to this set of questions may be attributable to several
important differences in these cultural settings. Private
investors and venture capital typically fund North American
Table II Path coefficients and p-values for the structural model
Path coefficients Bootstrapping results (p-values) Hypothesis no. Hypothesis supported?
CS ->SDR 0.059 0.489 H1 –Direct effect No
BFFH ->SFH 0.19 0.033 H2 –Direct effect Yes
CS ->SFH 0.245 0.002 H1a –Full mediation Yes
SFH ->SDR 0.429 0 H1a –Full mediation Yes
CS ->PCR 0.602 0 H1b –Full mediation Yes
PCR ->SDR 0.243 0.003 H1b –Full mediation Yes
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companies, while Brazilian companies are strongly dependent
on federal funding and a capital structure that was consolidated
through several IPOs during the 1998-2008 period. North
American enterprises are typically under more short-term
financial pressure for investor returns promised to analysts than
the counterparts in Brazil, so Brazilian firms may be less likely
to extend longer payment terms or reduce commitments to
their strategic partners. Future research is required to explore
Brazilian vs North American buying company sentiment
(Oliveira et al., 2009), specifically by considering the inter-
organizational power structure and strategic interdependence
between parties (Mahapatra et al.,2010). A future research
topic would explore whether Brazilian executives have a
stronger predisposition to engage in contract re-negotiation
and commitments to long-term sharing of risks and rewards.
Healthy buyers can make for healthy suppliers
The second hypothesis explored the impact of buyer size on a
firm’s willingness to promote SFH (H2). Approximately two-
thirds of the firms in our sample indicated their organization
has built up a strong cash position in anticipation of the
economic crisis, and over half expressed their belief they were
well prepared to manage through the economic trough. Of the
firms that were well prepared, larger firms prevailed, although a
good mix of small and large companies also expressed the belief
that they were in good shape. About 17 per cent of companies
were in a position where cash was so difficult to come by, that
they believed they needed to sell a division to build a stronger
cash position.
H2 suggests that financially healthy firms can leverage their
resources effectively to drive actions to improve supplier
financial heath during the economic recession. To make this
real, proactive procurement executives need to be able to
express the ROI of investments that reduce SDR. Research is
needed to better capture how supplier risk due to working
capital exposure and longer payment terms can create financial
risk for buyers, and how such risks can be mitigated through
alternative payment and financing options for suppliers.
Healthy suppliers reduce disruptions
Our research results support two other important posited
relationships: first, supply chain disruptions may be reduced
when buyers focus on improving key supplier’sfinancial health,
and second, PCR practices may also lead to reduction in supply
chain disruptions. We also note that the direct effect of
communication on disruption is not significant, suggesting that
communication between buyers and sellers is not a sufficient
condition to minimize SDR. When buyers were asked what a
probable impact of a supply chain disruption would be, 39
per cent stated it would reduce revenue, 21 per cent stated
deteriorating customer service, 13 per cent stated a shutdown
of operations and 28 per cent felt that it would impact two or
more of these elements. The total effect of communication on
supplier disruption is only meaningful when it occurs through
its mediator, contract renegotiation (total indirect effect =
0.252). The results support the fact that CS must be combined
with a proactive approach for meaningful contract
renegotiations and access to working capital.
During the global economic recession, only 50 per cent of
buying firms we surveyed were making any efforts to work with
and assist suppliers deal with financial issues, and less than 20
per cent were adjusting policies in accounts payables and
receivable. Future research is needed to identify specific
cognitive elements that explain financial disruption risk
phenomena, especially in the interpretation of different external
parameters that drive buyer perceptions regarding the
disruption mitigation decision-making process (Ellis et al.,
2011). It is especially important to consider multi-tier risk
under conditions of contagion, as research suggests that a
system-wide characteristic of resilience of the overall supply
chain is not necessarily indicative of the resilience of its
individual tiers.
Limitations
Research of supply chain management, company financial
performance (including working capital management) and
behavioral sciences through enactment theory are combined to
create new information on a complex phenomenon. Even more
importantly, this study supports the axioms of this journal
stating that enterprises must move from competing as
individual companies, and transform to competing as value
chains/business networks. The need for this transformation has
been recognized by academia but more empirical studies are
needed to link it to industry. However, as in all research, there
are limitations with the current study. First, thetarget sample in
this study, in seeking to examine Enactment Theory issues
quantitatively, captured perceptions of SFH and buyer
financial health using perceptual measures. Validation of
industry-specificfinancial ratios and figures could provide a
richer set of insights and some quantitative measures for
establishing a baseline on what levels of financial ratios actually
result in disruptions. Future research should also consider
using a cross-sectional sample and applying a qualitative
approach to capture risk from a greater variety of industries and
supply chain dynamics.
Another limitation is that supply disruption data were
gathered with a survey instrument deployed at a specific point
in time (during a global economic meltdown). Therefore, it is
not possible to infer what might happen over a different or
extended period of time. This would be an important next step
for several reasons. It would be interesting to understand what
the outcomes were of these supplies with a longitudinal study
revisiting these dyads, and determining what has happened
since. Second it will be important to explore the context of
communication using real-time information sharing
technologies.
Conclusion
The results of this study contribute to our knowledge of how
buyers perceive risk during periods of global economic risk, and
suggest that improved perception of risks takes place through
open communication, improved understanding of supplier
financial status, buyer actions to improve contractual terms and
subsequently fewer disruptions to supply chain performance.
Open communication is a key component of Supplier
Relationship Management, involving post-award contract
management with suppliers, which includes the need for on-
going monitoring of working capital and financial health
conditions.
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This research has several implications for supply chain
research. First, the results emphasize the importance of regular
dialogue and CS that may lead to contract re-negotiations.
Such efforts may be deemed at first to be counter to contracts,
given that there is an impression in many Western countries
that contracts cannot be modified, and that parties are legally
bound to contracts under all conditions. The reality of the dire
consequences of the global economic recession emphasizes the
need for more “relational contracting”, as espoused by
organizations such as the International Association of
Commercial and Contract Management. In such cases,
contracts are a vehicle for communication and management of
risk, which entail regular communications and discussion.
Variation in how such dialogues should take place, their
frequency, the types of policies that can be adopted and the
criteria for initiating discussions in various countries may differ,
and are a fruitful subject for research in SDR.
A second requirement is the need to extend this research
beyond the buyer–supplier dyad. The research suggests that
one-on-one discussions can provide insights into financial
contagion, but a broader approach to understanding the impact
of economic contagion both horizontally (across more than one
supplier) and vertically (beyond Tier 1 suppliers) can provide
additional insights (Bode and Wagner, 2012). A supply chain
network approach to risk is consistent with prior research in this
journal (Wagner and Fearne, 2015). In addition, the
emergence of technologies such as block chain may provide
greater transparency on suppliers’financial condition and lead
to improved actions on the part of all parties (Handfield and
Linton, 2017).
Another important insight is that financial supplier
disruption risk has a major impact on operational chain
disruption, and that in fact, what happens to suppliers can have
a direct impact on buyer’s outcomes. This can come in the form
of material shortages, price increases or customer stock-outs, all
of which have negative consequences for the buying
organization. Our results point to the countervailing forces of
contract renegotiation that can help to reduce the likelihood of
these events occurring. Such an approach is long overdue as
organizations expand their global supply networks to emerging
countries and established economic regions alike.
Note
1 Higher SDR scores represents lower financial supply
disruption risk.
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Appendix 1. Measures
Please answer all questions as they relate to your key “critical”
suppliers of products and services.
Supplier financial health (composite reliability 0.735)
Our large suppliers are well prepared for an economic
downturn.
(4a –Outer Loading 0.688, p-value <0.001)
Our small- to medium-sized suppliers are well prepared
for an economic downturn.
(4b –Outer Loading 0.674, p-value <0.001)
We have had suppliers come to us requesting shorter
payment terms.
(4d –Outer Loading 0.748, p-value <0.001)
Buyer communication with suppliers (composite reliability
0.860)
On-going regularly scheduled communication sessions
with senior executives of supply chain partners to update
current financial status.
(7ee –Outer Loading 0.850, p-value <0.001)
Detailed discussions focused on Business Continuity
Planning and contingency plans in the event of financial
disruptions to supply chain partner operations.
(7gg –Outer Loading 0.886, p-value <0.001)
Buying firm financial health (composite reliability 0.899)
Our organization is well prepared to deal with the current
financial crisis.
(1a –Outer Loading 0.891, p-value <0.029)
Our enterprise has built a strong cash position in
anticipation of an economic crisis.
(1b –Outer Loading 0.915, p-value <0.020)
Proactive contract re-negotiation (actions) (composite reliability
0.873)
Review and strengthening of contractual terms with key
partners to drive compliance.
(7aa –Outer Loading 0.871, p-value <0.001)
Review of contracts to discuss re-negotiation of terms that
ensure relationship longevity and mutual sharing of risks
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and rewards.
(7bb –Outer Loading 0.851, p-value <0.001)
Policy changes for supplier/customer accounts payable/
accounts receivable terms to accommodate cash flow
problems.
(7cc –Outer Loading 0.726, p-value <0.001)
Development of informal agreements/MOUs that
communicate a commitment to a long-term relationship
with key suppliers/customers.
(7dd –Outer Loading 0.722, p-value <0.001)
Supply disruption risk (composite reliability 0.783)
Suppliers within our supply base have not experienced
significant problems in obtaining short-term credit that
may risk disruptions to their normal operations.
(4e –Outer Loading 0.756, p-value <0.001)
We have not experienced pricing increases from suppliers
associated with the financial crisis.
(4f –Outer Loading 0.693, p-value <0.001)
We have not experienced erratic deliveries in the last
two months associated with the financial crisis.
(4g –Outer Loading 0.670, p-value <0.001)
We are aware of several suppliers who have not cut back
on future capacity expansion and capital investments for
the coming year.
(4h –Outer Loading 0.639, p-value <0.001)
Figure A1 Cross loadings
BFFH
CS
PCR
SDR
SFH
1a
0.891
–0.128
–0.040
0.030
0.138
1b
0.915
–0.078
–0.035
–0.001
0.155
4a
0.279
0.046
0.062
0.187
0.688
4b
0.195
0.106
0.048
0.313
0.674
4d
–0.036
0.261
0.235
0.458
0.748
4e
0.094
0.297
0.267
0.756
0.474
4f
–0.044
0.199
0.251
0.693
0.287
4g
–0.023
0.194
0.238
0.670
0.248
4h
–0.031
0.101
0.233
0.639
0.275
7aa
–0.107
0.560
0.871
0.317
0.199
7bb
–0.068
0.509
0.851
0.303
0.194
7cc
0.042
0.399
0.726
0.172
0.043
7dd
0.036
0.426
0.722
0.326
0.124
7ee
–0.118
0.850
0.518
0.213
0.141
7gg
–0.081
0.886
0.528
0.304
0.241
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Appendix 2
Table AI Differences between Brazilian and North American sample means
Survey item Assumption
t-test for equality of means
tdf
Sig.
(2-tailed)
Mean
difference
Std. error
difference
95(%)
confidence
interval of the
difference
Lower Upper
Existing merger and acquisition
deals have been put on hold until
further notice (inverse)
Equal variances assumed 2.261 196 0.025 0.405 0.179 0.758 0.052
Equal variances not assumed 2.311 186.667 0.022 0.405 0.175 0.751 0.059
We are actively encouraging early
retirements in our workforce
(inverse)
Equal variances assumed 2.537 196 0.012 0.468 0.184 0.104 .831
Equal variances not assumed 2.461 154.389 0.015 0.468 0.190 0.092 .843
We have put on hold all capital
investment activity (inverse)
Equal variances assumed 2.936 196 0.004 0.487 0.166 0.814 0.160
Equal variances not assumed 2.924 171.867 0.004 0.487 0.166 0.815 0.158
We have held meetings with our
critical suppliers to determine the
impact of the current crisis within
their organization
Equal variances assumed 1.866 196 0.064 0.328 0.176 0.019 0.675
Equal variances not assumed 1.907 186.855 0.058 0.328 0.172 0.011 0.668
Our large customers are well
prepared for an economic
downturn
Equal variances assumed 1.690 196 0.093 0.263 0.156 0.570 0.044
Equal variances not assumed 1.733 188.326 0.085 0.263 0.152 0.563 0.036
Our small- to medium-sized
customers are well prepared for an
economic downturn
Equal variances assumed 2.026 196 0.044 0.278 0.137 0.549 0.007
Equal variances not assumed 2.100 192.395 0.037 0.278 0.132 0.539 0.017
Customers within have experienced
significant problems in obtaining
short-term credit that may risk
disruptions to their normal
operations (inv)
Equal variances assumed 3.009 196 0.003 0.430 0.143 0.711 0.148
Equal variances not assumed 3.136 193.867 0.002 0.430 0.137 0.700 0.159
Review and strengthening of
contractual terms with key partners
to drive compliance
Equal variances assumed 2.396 196 0.018 0.420 0.175 0.074 0.766
Equal variances not assumed 2.479 191.739 0.014 0.420 0.170 0.086 0.755
Policy changes for supplier/
customer accounts payable/
accounts receivable terms to
accommodate cash flow problems.
Equal variances assumed 4.530 196 0.000 0.735 0.162 0.415 1.055
Equal variances not assumed 4.675 190.889 0.000 0.735 0.157 0.425 1.045
Development of informal
agreements/MOUs that
communicate a commitment to a
long-term relationship with key
suppliers/customers
Equal variances assumed 3.491 196 0.001 0.581 0.166 0.253 0.909
Equal variances not assumed 3.624 192.766 0.000 0.581 0.160 0.265 0.897
Morale within our firm is at an all-
time LOW (inv)
Equal variances assumed 2.754 196 0.006 0.480 0.174 0.136 0.824
Equal variances not assumed 2.731 169.197 0.007 0.480 0.176 0.133 0.827
We are considering a wave of
downsizing in light of current
economic conditions (inv)
Equal variances assumed 2.511 196 0.013 0.459 0.183 0.099 0.820
Equal variances not assumed 2.474 164.932 0.014 0.459 0.186 0.093 0.826
We have held a number of town
meetings and discussion groups
with our associates to share our
views on how we plan to handle
the current crisis
Equal variances assumed 2.554 196 0.011 0.482 0.189 0.110 0.854
Equal variances not assumed 2.576 179.664 0.011 0.482 0.187 0.113 0.851
(Continued)
An enactment theory model
Marcos Paulo Valadares de Oliveira and Robert Handfield
Supply Chain Management: An International Journal
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Corresponding author
Robert Handfield can be contacted at: rbhandfi@ncsu.edu
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Table AI
Survey item Assumption
t-test for equality of means
tdf
Sig.
(2-tailed)
Mean
difference
Std. error
difference
95(%)
confidence
interval of the
difference
Lower Upper
We are actively seeking input from
our associates on opportunities to
improve morale within this
environment
Equal variances assumed 2.083 196 0.039 0.369 0.177 0.020 0.718
Equal variances not assumed 2.154 191.587 0.032 0.369 0.171 0.031 0.706
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Supply Chain Management: An International Journal
Volume 22 · Number 5 · 2017 · 442–457
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