Relationship between Manufacturer and Distributors

Relationship between Manufacturer and Distributors

Relationship between Manufacturer and Distributors

Theoretical Background: 
The literature about knowledge transfer explores how acquisition of knowledge may improve performance in the supply chain, including manufacturer and other actors in the supply chain. 

Conceptual and empirical arguments may expand the notion of performance monitoring in the supply chain. Prior studies consider that an activity designed to control potential opportunistic behavior can also be a form of knowledge transfer (Calantone & Gassenheimer, 1991; Weitz & Jap, 1995). It challenges the assumption that monitoring others can degrade a relationship and it can be negatively viewed from the perspective of those being monitored.

The knowledge theory of the firm has attempted to understand the existence and organization of firms as resulting from the creation, acquisition, appropriation, and management of knowledge by individuals and organizations (Grant, 1996; Nonaka, 1994). Organizational knowledge can be viewed as information that is systematically verified and produces other information that can be used to understand more complex systems (Kogut & Zander, 1992).

The processes of knowledge creation and acquisition are related to the context. Thus, there is a need for a physical place where firms can create knowledge and transfer part of it to their partners (Nonaka, Toyama, & Nagata, 2000). The mechanisms of creation, appropriation and knowledge transfer allow the firms to store specialized knowledge that are integrated and transformed within their boundaries (Grant, 1996). Prior studies like X. Li and Chandra (2007) explored the existing challenges for knowledge integration in complex network management especially in geographically dispersed supply chains. Nevertheless, Nonaka, Toyama and Nagata (2000) identified different types of knowledge creation that are related to tacit or explicit knowledge. Socialization occurs when there is only tacit knowledge exchange. Nonaka et al. (2000) also mentioned that the process of acquiring knowledge in this case is based on internal interactions and other forms of interaction with suppliers or customers, and this is often related to the physical proximity. On the other hand, knowledge creation, identified as internalization, is present when the existing explicit (or formalized knowledge creates new tacit knowledge. In this case, internalization is present in activities like learning-by-doing, training and exercises. Externalization is identified when tacit knowledge is transformed into formalized knowledge, such as training material, documents, and norms, among other forms (Nonaka & Konno, 1998).

The processes through which firms organize and transfer knowledge are the most valuable in understanding the nature of the relationship between the manufacturer and other partners, like distributors (J. H. Dyer & Nobeoka, 2000). Routine visits are used by firms to create and transfer tacit knowledge among them, because these allow organizational members and other external partners to share experiences, express their problems, and learn better ways to perform tasks (J. H. Dyer & Nobeoka, 2000; Nonaka & Takeuchi, 1996). At the same time, there are also other forms of knowledge creation and transfer, such as formal meetings, negotiation processes, formal training sessions, and informal interactions, among many others. As a result of these interactions, Modi and Mabert (2007) showed that knowledge transfer throughout the supply chain may improve performance. In a manufacturerdistributor relationship, some of these forms of interaction happen in a long-term relationship, allowing the distributors to access valuable knowledge created by the manufacturer (Xuan, Xia, & Du, 2011). Y. Li, Liu and Liu (2011) found that co-operative activities improve knowledge acquisition by the manufacturer from the distributor. Thus, Frazier (2009) stressed that, as distributors play a central role in generating sales for manufacturers, the latter should transfer an amount of tacit, explicit knowledge on products and their benefits, and “encourage intermediate persons to process and integrate such knowledge to enhance their capabilities” (Frazier, 2009, p. 33).

Model Development and Hypothesis:
The proposed theoretical model is based on the organizational knowledge approach. It considers that the manufacturer relies on the distributor to sell its products. The presence of asymmetric information between seller and buyer (or manufacturer and distributor) may influence the second to behave opportunistically, diverging from the manufacturer’s goals and increasing the need for monitoring by the manufacturer. However, by monitoring the performance of the distributor, the manufacturer becomes involved and interacts with the distributor in order to ensure the proper development of tasks by the distributor (Y. Li et al., 2011). Zhou, Zhang, Zhuang and Zhou (2015) showed that relational governance combines relational norms and collaborative activities. This interactive process, in turn, helps the knowledge transfer processes from the manufacturer to the distributor, which may increase the knowledge base of the distributor and improve its performance.

Knowledge-sharing activities between manufacturer and its distributors can be an important factor affecting overall supply chain performance, as found by Hult, Ketchen and Slater (2004) in their study about how information-sharing and face-to-face discussions can improve supply chain performance. Figure 1 illustrates our proposed model.

Performance monitoring:
The proposed model considers the relationship between the manufacturer and distributors according to the agency theory perspective (Jensen & Meckling, 1976), in which the principal actor relies on the agent. Nevertheless, this perspective suggests the distributor may sometimes behave in its own self-interest rather than that of the manufacturer (see for example Zeng, Chen, Dong, & Zheng, 2015). The reasons are explained by certain activities that demand investments and efforts, and are not perceived as useful or worthwhile by the distributor. At the same time, the manufacturer can invest in activities, such as monitoring the distributor’s performance or training its team.

In the case of the manufacturing-distributor relationship, the manufacturer can be viewed as the principal actor and the distributor as the agent. Although the manufacturer and the distributors share the same goal of maximizing sales of the manufacturer’s products and the distributors may diverge in the way that these products are sold. In this case, for example, distributor may “carry insufficient inventories of the manufacturer’s products, carry and promote competing products, set prices above or below the preferred range, advertise and promote the product inappropriately, train sales personnel improperly, fail to provide after-sale services, etc.

Thus, the manufacturer-distributor relationship may face several situations that lead to insufficient effort employed by the distributor to achieve the manufacturer’s goals, called moral hazard, and/or misrepresentation of the distributor’s characteristics to secure a contract with the manufacturer, termed adverse selection by Eisenhardt (1989). In both cases, monitoring distributor performance may be a required activity conducted by the manufacturer to ensure proper distributor behavior, especially in the case of intensive technology products, which incur high investments in production and distribution. This monitoring activity gathers information that can be used to qualify distributors in a close-looped process. In this aspect, knowledge transfer is central.

Performance monitoring is defined as overseeing the elements of co-ordination employed by a manufacturer to monitor the performance of its distributors (Frohlich & Westbrook, 2001). It implies a constant process of evaluation and feedback between manufacturers and their distributors, maintaining the information flow between the companies involved in this process and stimulating informationsharing behavior. Monitoring distributor performance helps manufacturers to keep track of flaws in distributor activities related to the product and consequently to prepare actions to deal with those flaws. In this way, performance monitoring is needed to control the results of distributors, based on the customers’ demands and coordinating methods (Frohlich & Westbrook, 2001). It has been viewed as a central element in a principal-agent relationship, so the principal can reduce the potential opportunistic behavior of the agent (Calantone & Gassenheimer, 1991; Heide, 1994; Weitz & Jap, 1995). A next step in performance evaluation is cooperation. Cooperation helps to develop trust and at the end to improve performance (Huemer, 2014).

Our study attempted to understand the effects of manufacturer-to-distributor knowledge transfer on the performance of transport equipment dealers. Based on the perception of managers from 199 distributors in Brazil, our model evaluated the influence of performance monitoring and direct involvement on knowledge transfer, and the overall effect on distributor performance. The results provided evidence suggesting that our model was confirmed in the sample analyzed.

In summary, tacit and explicit knowledge acquisition may contribute to distributors’ learning about their own performance, mistakes, and weaknesses. At the same time, each distributor may learn from the experience acquired by the manufacturer in contact with a number of other distributors. By obtaining additional knowledge about their performance, weakness and other facts, the distributors are better prepared to develop an action plan to improve operations, adjust performance, and, ultimately, increase business performance.

Our study also provides some contributions to the literature on supply chain management. First, instead of focusing on the manufacturer-supplier relationship, which has been the dominant approach in the supply chain literature, this study investigated the manufacturer-distributor relationship. Product distribution in emerging economies like in this study may be an additional challenge for manufacturers because these countries are experiencing substantial growth in their economies, sometimes with an inappropriate product distribution structure. Distributors often have limited resources available to deal with such an increase in the volume and range of products offered due to the entry of new manufacturers into the domestic market. This can be even more problematic if we consider technological products, like computers, cellphones, cars, and other innovative products, since their demand for complex knowledge may not be fully available in countries with such great disparities as the emerging economies, like Brazil, China, Russia and India. Our contribution is to partially fill this gap by providing a perspective of the Brazilian transport equipment industry distributors. 

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