Risks affecting supplier-distributor relationships : evidence from Middle Eastern companies

Abstract

For many manufacturers of fast moving consumer goods (FMCG), Middle Eastern markets are viewed as emergent economies with high growth potential. Some countries of the Middle East are witnessing a rise of modern trade channels such as hypermarket and supermarket formats, others are still dominated by traditional retailers such as wholesale and grocery store formats. Within this context, the decision to outsource the sales and distribution activities of a firm results in significant benefits but it also entails many dyadic risks between suppliers and their distributors. The purpose of this research is to understand how FMCG suppliers/manufacturers and distributors perceive relevant dyadic risks and how these risks are mitigated. The research examines the dyadic risk mitigation strategies adopted by both suppliers and distributors using relevant propositions based on transaction cost economics and agency theories. The propositions are explored by analysing 15 multiple dyadic cases which focus on the FMCG industry in three representative markets of the Middle East: Iraq, Kingdom of Saudi Arabia (KSA), and United Arab Emirates (UAE). Semi structured interviews have been conducted with 30 experts from the FMCG industry in the Middle East, split between suppliers and distributors. The research shows that FMCG suppliers in the Middle East are affected by dyadic risks that hinder their ability to control their performance. Distributors also face dyadic risks that are due to their dependency on suppliers, which affects their future sustainability. Dyadic Risk Mitigation strategies include deploying a control system and reviewing the formal contracting structure, as suggested by agency theory, while another strategic approach relates to a partial or vertical integration of assets of high specificity, as proposed by transaction cost economics theory. The research shows that trust plays a pivotal role in the relationship between suppliers and distributors. From a practical perspective, the research contributes to proposing a transformation road map that encapsulates guidelines and tools that managers can use to diagnose their dyadic risks and map their optimal dyadic risk mitigation strategy.