The relationship between the perceived shares of costs and earnings in supplier development programs and supplier satisfaction

Supplier improvement and supplier development are relevant management activities for industrial buyers. Supplier development programs require investments by both parties and may produce higher earnings. Thus, the distribution of costs and earnings between the parties is a relevant factor in this context. This study examines the effects of a supplier's perceived share of costs and earnings in supplier development programs on supplier satisfaction. In a sample of 38 suppliers, we find that the supplier's perceived share of earnings affects supplier satisfaction positively and that distributive fairness mediates this effect. According to our data, the perceived share of costs has no effect on supplier satisfaction. This result suggests that buyers should design supplier development programs in a manner that permits high cost shares for the suppliers, but gives those suppliers the impression that they significantly participate in the resulting earnings. In addition, using dyadic data from buyers and suppliers, this research indicates that the gap between the suppliers' and the buyers' perceptions of their share of costs and earnings is larger when suppliers are less competent. This finding may suggest that supplier development programs involving less competent suppliers require intense communication with those suppliers. ► In supplier development, the distribution of costs and earnings between the parties are relevant factors. ► This study examines the effects of a supplier’s perceived share of costs and earnings on supplier satisfaction. ► We find that the positive effect of the perceived share of earnings on satisfaction is mediated by distributive fairness. ► The gap between the partner’s perceptions of their share of costs/earnings depends on supplier competence. ► Future studies should test the effects with larger samples, and the small sample this study uses is a limitation.