Don't stand so close: The downside of suppliers getting cozy with their customers

July 30, 2013

Specialty suppliers such as those that cluster around the technology industry in the Silicon Valley and the auto industry in Detroit foster economic growth, right?

New research by Maxim Sytch, professor of management and organizations at the University of Michigan Ross School of Business, shows there's a downside to suppliers locating in close proximity to their customers. These suppliers eventually create demand for their services without regard to the growth of the industry cluster.

"I find the influence of this specialist supplier base is not always positive," Sytch said. "At first, they are naturally attracted to these geographic clusters because there's demand."

Sytch studied the role firms play as specialist suppliers of legal services to biotechnology and pharmaceutical companies. He examined the patterns of co-location among law firms' offices and the companies, the amount of that followed and the outcome of the litigation.

Proximity allows sustained social contact with companies to influence toward aggressive and often protracted legal action. The matters are further complicated by the specialized nature of and intellectual property litigation.

Patent litigation is very sophisticated and in-house counsels of corporations—even those of biotech and pharma companies—can't always get a handle on it, Sytch said. So they rely on the expertise of nearby suppliers.

"The underlying mechanism here is by lawyers as carriers of expert knowledge," he said."This is emblematic of a more general tendency in human behavior where we rely on experts and their advice to help us deal with uncertainty."

So how can companies get a better idea of what's necessary from a specialty supplier? The less a company knows about an issue, the more it relies on a niche supplier.

Sytch said that recognizing this tendency and perhaps gaining some additional expert knowledge in a critical area—such as intellectual property in biotech and pharma—would be a good start. Full-scale outsourcing comes with risks.

Explore further: Pharmaceutical intellectual property laws need reform

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not rated yet Jul 30, 2013
Proximity allows sustained social contact with companies to influence toward aggressive and often protracted legal action. ... The less a company knows about an issue, the more it relies on a niche supplier.

Hmm. I guess ignorance is bliss.
5 / 5 (1) Jul 30, 2013
Full-scale outsourcing comes with risks.

As soon as you let someone else handle a part of your core business aspects (i.e. something that can cripple your business if it's done not to spec or not done at all) then you're more or less sunk.

.Lawyers tend to 'find' business - simply by making up reasons to go into litigation with each other (while the companies employing them have to pay). And that certainly is not fo the benefit of anyone (except the lawyers of course)

But I can't see how that would translate to competing companies for supplying e.g. spcialty auto parts. Unless they each outsource their production to the other whenever they get a new client and charge extra as a 'middle-man' (hey - there's an idea fo a nice inside scam).
1 / 5 (2) Jul 31, 2013
Making the leap from legal counseling firms to parts suppliers is nonsensical. Legal firms aren't suppliers, they are counselors. For the lawyers, a corporation is a client. For a supplier the corporation is a customer.
Detroit is still in the game only because it's infrastructure for manufacturing is hard to beat, even to this day. It has an large (well largish nowadays) pool of skilled tradesmen in professions critical to modern manufacturing. It has vendors for practically anything a manufacturer could need. I could go on, but you get the point. All of this only matters because it's all located in a small region. Moving away from your customers is a good way to increase shipping costs and communication problems. Suppliers generally can't create demand for their product. The article's point is, as I said earlier, nonsensical. If anything this simply demonstrates unethical behavior of the law firms toward their clients.
not rated yet Aug 11, 2013

You are correct. I would be hesitant to generalize the findings of my study to the automotive sector in particular (and to the manufacturing sector in general). My empirical findings apply to the legal space directly. However, broader generalizations to the service sector are possible. For example, could a local concentration of organizational consultants lead companies to embark on more frequent and long-lasting reorganization efforts? Or, can the local presence of investment bankers and legal advisories lead companies to pursue mergers and acquisitions more actively? Similarly, could we observe more negative and expensive political campaigns in areas with higher concentrations of political consultants? Furthermore, as social movements seem to rely increasingly on professional consultants for growth and organization, what implications would the consultants' local presence and involvement carry for the generation and effectiveness of these movements?

not rated yet Aug 11, 2013
For the manufacturing sector, I would like to explore if the influence of proximate suppliers could apply not to the volume of purchases, but rather to the choice among competing products. A potential downside would be being/staying locked into purchasing sub-par commodities from proximate suppliers.

Toolman78, your distinction re: counselor-client escapes me. Relations in the legal sector have evolved into a rather standard buyer-supplier exchange, where law firms are selling legal advice and expertise to buyers (companies, in this case); and companies increasingly outsource these services. These exchanges are often characterized by divergent incentive structures and conflicts of interest. You could draw analogies to investment banking, IT, consulting, etc.
1 / 5 (2) Aug 11, 2013
The relationship between a law firm and it's client isn't like a buyer-supplier relationship for several reasons. But the most important distinction is that an unethical counsel can lead to increased need of counseling. A parts supplier on the other hand may offer advice on the applications and specifications of their products, but they are rarely in a position to create demand for their product beyond providing an good product. Beyond that suppliers deal with physical objects that cost money to ship and store. So physical proximity to each other reduces costs for both the buyer and the supplier. Also many products are in a process of constant improvement/optimization by means of cooperation between suppliers and their customers, that is far more rapid when in close proximity of each other.
And as far as drawing analogies between legal counsel, investment banking and even certain aspects of IT, they are all client-advisor relationships.

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