Dayna Simpson, Damien Power and Daniel Samson

1. GREENING THE AUTOMOTIVE SUPPLY CHAIN: A RELATIONSHIP PERSPECTIVE Dayna Simpson, Damien Power and Daniel Samson International Journal of Operation & Production Management Vol.27, No.1, 2007 pp.28-48

2. INTRODUCTION Organizations have become increasingly aware of the propensity for Environmental pollution incidents within their supply network to cost them in penalties, cleanup and consumer backlash. As a result, minimum standards of environmental performance have become increasingly prevalent in the purchasing contracts or guidelines of multinational corporations for their local and global suppliers (Bowen et al., 2001a; Zhu and Sarkis, 2004). This research seeks to extend the small but growing body of knowledge Surrounding the introduction of environmental performance requirements into supply contracts or statements of supply chain stewardship. The major contribution of this research will be not just to explore the existence and application of such requirements but to explore the influence of specific exchange conditions on their uptake and effectiveness.

3. Literature review Stakeholder management and environmental performance Recognition and development of an organizational requirement to manage its impact on the environment has developed largely in response to increasing levels of government regulation and profile-raising of environmental issues by non-financial stakeholders (politics, community and media) (Aragon-Correa, 1998; Hoffman, 1999; Bansal, 2005). Antecedent theory proposes that the organization’s response to the Environmental requirements of its external stakeholders will be influenced by its existing level of environmental commitment. (Hunt and Auster, 1990; Henriques and Sadorsky, 1999;Aragon-Correa and Sharma, 2003).

4. Literature review • Customer-supplier interactions and environmental performance • Programs developed by business to “green” supplier activities or include • environmental performance requirements in supply guidelines are increasingly • evident in practice. Such initiatives are broadly referred to as either • green-supply or green-supply-chain in both the academic and practitioner • literature. These have largely included activities with suppliers such as: • programs to reduce or eliminate materials used in manufacturing processes • or products; • - programs focused on the environmental compliance status and practices of • supplier operations; • - joint development of new materials, processes or other solutions to • environmental issues (Sarkis, 2003; Green et al., 2000).

5. Literature review Customer-supplier relationships Inter-firm relationships are critical to the successful coordination of supply chains and improvements in the performance of suppliers’ production capabilities (Lamming,1996; Handfield et al., 2000; Scannell et al., 2000). The supply relationship is an important channel for communicating customer requirements to suppliers and achieving longer term goals of production (Lamming, 1996; Handfield et al., 2000;Scannell et al., 2000). Managed supply chain relationships can often attain the types of performance improvement and superior competitive advantage that are not readily generated by open market transactions (Lamming, 1993; Burt and Doyle, 1993; Dyer and Nobeoka, 2000).

6. Development of hypotheses H1. The supplier’s level of environmental commitment is related to the environmental performance requirements of its major customer. It is a major proposition of this study that suppliers will not only be influenced by the environmental performance requirements presented to them by their customers, but also importantly the magnitude of this influence will depend on the existing conditions of the supply relationship. These conditions in the relationship will moderate the impact that the customer’s environmental performance requirements has on the environmental commitment of its suppliers.

7. Development of hypotheses H1. The supplier’s level of environmental commitment is related to the environmental performance requirements of its major customer. Prior works have found increasing levels of environmental commitment and greater occurrence within the organization of for example, pollution prevention and incorporation of the environment in product design and innovative practices (Buysse and Verbeke, 2003); being more inclusive of environment-related stakeholders (Aragon-Correa, 1998); incorporating practices that support pollution reduction (Sharma and Vredenburg, 1998; Klassen, 2001); more likely to use environmentally conscious manufacturing practices (Bowen et al., 2001a, b); and have an increasing intention to preserve ecological integrity (Judge and Elenkov, 2005).

8. Development of hypotheses H2a. The presence of relationship-specific investments will improve supplier response to the customer’s environmental performance requirements. Relationship conditions that promote relationship-specific investment between the customer and the supplier – particularly in regard to the supplier having dedicated time, future goals, equipment or capacity to the relationship – potentially allow the supplier to be more “aware” of the customer’s environmental reputation and value system.

9. Development of hypotheses H2b. Contracts signed between the customer and the supplier will improve supplier response to the customer’s environmental performance requirements. Contracts support asset-specific investments in that they provide a form of governance between the customer and the supplier that not only protects assets sunk into the relationship, but also identifies paths for dispute resolution and outcomes for non-compliance (Williamson, 1975). Contracts are effectively a safeguard against opportunistic behaviour and set clear boundaries for default on contractual specifications between the customer and the supplier.

10. Development of hypotheses H2c. Use by the customer of supplier assessment will improve supplier response to the customer’s environmental performance requirements. Klassen and Vachon (2003, p. 347) found evaluation activities to have a positive impact on the level of investment in environmental management by suppliers: 「More specifically, customers who implement supplier audits, establish formal evaluationprocesses, and offer feedback to suppliers are likely to see positive changes in how suppliersregard environmental issues. The greater direct scrutiny by customers likely captured theattention of suppliers’ plant managers and encouraged greater environmental investment.」

11. Conceptual model Assuming from the work of previous authors that higher levels of environmental commitment will lead to a greater likelihood of improving environmental performance – for example through pollution reduction or environmentally beneficial operational practices – this study will assess the impact of an externally derived set of environmental requirements on the organization’s level of environmental commitment.

12. Methodology Sample and data collection An initial study was undertaken involving preliminary discussions with operations managers and purchasing managers at six first tier automotive component supplier firms in the Australian manufacturing base. Sample was sourced from two known industry databases with up-to-date memberships. -Database 1 contained all first and second tier component suppliers in the Australian automotive industry (200 contacts) obtained through the Federation of Automotive Products Manufacture. -Database 2 contained all tooling firm suppliers in the Australian automotive industry (200 contacts) obtained through the Tooling Industry Forum of Australia. The instrument was distributed by both mail and e-mail.

13. Methodology Of the 400 surveys distributed, 56 usable surveys were returned for a response rate of 15 percent. To assess the possibility of differences between early respondents, late respondents and non-respondents, a comparison of the demographics of the survey respondents was made to the demographics of the larger population. (after Armstrong and Overton,1977)

14. Measures The final instrument used a 5-point Likert scale (1=not at all; 3=to some extent; 5=to a very large extent). Each measure was extracted using factor analytic techniques after Hair et al. (1998) and Tabachnick and Fidell (2001).

15. Measures Customer’s environmental performance requirements. This was intended to capture an aggregate measure of the supplier’s underlying commitment to its environmental responsibilities using a scale which indicated environmental commitment as expressed through the organization’s policies, values and employee awareness programs.

16. Measures Environmental commitment A measure for the customer’s environmental performance requirements for its suppliers was derived from three items developed largely during the preliminary study.

17. Measures Conditions of the customer-supplier relationship To explore the effect of supply “conditions” on the relationship between the customer’s environmental performance requirements and the supplier’s environmental commitment the analysis includes three moderator variables.

18. Data analysis Returned surveys were analysed using linear regression analysis with SPSS V.12. Data were checked first for normality assumptions using normal probability plots and tests for kurtosis and skewness. Items were reduced into relevant scales using factor analysis and factor loadings of less than 0.65 were excluded (Tables II, III and IV). Tests for multi-collinearity were completed using variance-inflation and tolerance factors. Overall, significance of the regression model was assessed using the test statistics of standardized (b) co-efficients, standard error of the co-efficient, F and adjusted R 2. A final moderated multiple regression (MMR) analysis was used to test H2a-2c after that described in Baron and Kenny(1986) and later in Aguinis (2004).

19. Results H1: The results of the regression analysis show no statistically significant relationship between the supplier’s level of environmental commitment and the customer’s environmental performance requirements.

20. Results H2a, 2b, 2c: In the MMR analysis, the primary regression relationship between the environmental commitment construct and the customer’s environmental performance requirement construct becomes statistically significant for the Investment model (change in adjusted R 2 is significant at p , 0.001) but not for the Contracts or Assessment models.

21. Discussion For the customer’s environmental performance requirements, the presence of Investment between the customer and the supplier provided a significant influence on the response of the supplier to its customer’s needs. In the relationship between the customer’s environmental performance requirements and the supplier’s environmental commitment, the Investment condition as a moderator proved highly significant as a predictor of variance in the environmental commitment construct. (significance of the change in adjusted R 2 value – p , 0.01). The influence of the customer’s environmental performance requirements on the supplier’s level of environmental commitment was not significant unless specific customer-supplier relationship conditions were also present to moderate the supplier’s response.

22. Discussion In the absence of customer-supplier relationship conditions – that is without any “legitimacy” for the customer’s environmental performance requirements, as assessed by the supplier – the relationship described by hypothesis H1 was not significant. The process of supplier performance improvement can often involve a long-term cooperative effort by the customer including new equipment, supplier training and deployment of customer staff into the supplier’s plant. It can also take a low involvement form whereby the customer relies on the competitive force of the market to extract performance improvement. (Krause et al., 2000; Scannell et al., 2000;Handfield et al., 2000) These findings are supported by observations made during earlier discussions with operations managers in Australian automotive component supplier firms such that suppliers were desirous of emulating or adopting their customer’s environmental practices especially where the supply relationship was described by the supplier as being most critical to their firm’s survival.

23. Conclusions and further research The major finding of this research was that the customer’s environmental performance requirements can have a positive influence on a supplier’s strategic level of commitment toward its environmental responsibilities. The presence of relationship conditions that promote greater levels of financial commitment between the supplier and the customer – relationship-specific investment – is expected to increase this influence. Increasing levels of the supplier’s strategic environmental commitment is in turn expected to have a positive impact on the supplier’s environmental performance. This study has been able to provide some empirical support for a number of potential new theories in a large and under-developed field of research. Customer-driven programs of green-supply remain a potentially powerful tool for reducing the environmental impacts of product supply chains in addition to the influence that other non-financial stakeholders (government, community, employees) may have.