Personal relationships in supply chains: an agency theory perspective

Personal relationships (i.e. friendships) have been the subject of much research in the business discipline. The majority of the literature appears in the marketing discipline where researchers found that friends are more trustworthy and loyal business partners. Findings from this discipline also suggest that both business and personal relationships are critical to enhancing and building inter-organizational strength. However, personal relationships are not without drawbacks. Firms should therefore be cautious when relying heavily on managers‘ strong personal relationships within inter-firm relationships as such relationships may lead to negative consequences for the firms such as higher agency costs. Despite this, the current body of knowledge on this issue is relatively fragmented. This project was therefore developed to address this gap in the literature. An underlying objective of this study is to examine whether personal relationships that managers rely on within inter-firm relationships to promote the interest of the firm deviate managers from the firm‘s interest, and lead to negative firm-level consequences. For exploratory purposes, the study is qualitative in nature with an aim to build a theory. Overall, 30 in-depth interviews with Senior Managers of buying and supplying firms were undertaken. Senior managers from the buying firms belonged to the following organizations: manufacturer of chemical products, coffee machines, leather products, solar panels, construction materials, confectionary items, health care products, frozen food items and buyer of IT services. Senior managers from the supplying firm were associated with the following organizations: supplier of web ii services, financial services provider, education services provider, aviation services provider, supplier of gaming parts, language services provider, rental services provider, security services provider and consultancy services provider. Results from this study exhibit that managers exploit strong personal relationships, by demanding higher sales commission, higher bonuses and higher salary, subsequently leading to higher agency costs. Results further unveil that collapse of friendship between managers across firms develop ego clash, and they refuse/become reluctant to work together, which lead to higher opportunity costs for the firms involved. Results further highlight that Procurement Managers experience personal loyalty with Sales Managers as a result of strong personal relationships, which, in turn, causes higher opportunity costs for the buying firms, and reduces sales/business volume for the supplying firms, when Sales Managers switch to work for nearby competitors. Finally, Operations Managers from the buying firms experience high trust as a result of personal relationships with Operations Managers from the supplying firms, and continue the business relationships with Operations Managers from the supplying firms, despite the negative consequences (e.g. late deliveries), leading to higher operational risk for the buying firms. This study develops propositions which extend the application of agency theory within the supply chain domain, and further proposes a model based on the research findings. This study also provides several constructive guidelines to firms on managing personal relationships within inter-firm relationships in order to mitigate its negative firm-level consequences. For instance, senior management should carry out strict monitoring by requesting managers to more periodically fill out a iii disclosure form to report any sort of conflict of interests. This should be done to ensure that personal relationships between managers remain a source of benefit for firms and does not lead to suboptimal decisions. Senior management should also encourage managers to disclose if they have formed personal relationships (i.e. friendships) with their supply chain counterparts. This should not be done in an intimidating way because friendships can have positive outcomes for both buying and the supplying firms. Senior management should also observe and evaluate the outcome of managers‘ business dealings closely to ensure that they do not take unfair advantage of their personal relationships at the expense of the firm. Finally, senior management should rotate its managers having personal relationships with managers of supplying firms in order to allow different managers to nurture a business relationship to avoid the development of personal loyalty, but this should be done with caution as such rotation can affect managers‘ productivity. Implementing such recommendations will prevent managers from making decisions that work against the firm‘s best interest, while at the same time; personal relationships (i.e. friendships) developed between managers within inter-firm relationships can be a source of competitive advantage for the respective firms (such as higher business volume for supplying firms). Finally, the study concludes by acknowledging limitation and suggesting directions for future research.