Why playing favourites with suppliers can backfire

Some may see favouring certain suppliers as a reward for good performance, but it can erode trust and collaboration across the supply chain

Featured faculty: Yang Haibin
Written by Pan Jingyi

Global supply chains have been under pressure from trade tensions, geopolitical risks and rising logistics costs. In response, many companies are restructuring their supply chains with nearshoring and friendshoring strategies, or building closer networks with trusted partners.

These multinationals are keen to foster deeper relationships for greater security and collaboration. Strong partnerships with suppliers help ensure reliability, reduce risks and improve overall operational efficiency. Given that a company normally has multiple suppliers, it seems natural to identify the most strategic suppliers and treat them like VIPs by investing more time and resources, while managing others in a standard way. This approach is known as the differentiated relational strategy.

“Using differentiated relational strategy enables buyers to allocate their limited managerial resources effectively to achieve the highest returns,” says Yang Haibin, Professor at the Department of Management of the Chinese University of Hong Kong (CUHK) Business School.

However, there is a catch. In collectivist cultures like China, where equality within a group is valued, such a strategy may be perceived as favouritism and generate resentment. Suppliers serving the same buyer expect similar respect and fair treatment.

“A collectivist country emphasises tightly knit relational networks and the equality principle of reward allocation among network members.”

Professor Yang Haibin

For global companies that rely on Chinese suppliers, whether based in China or operating overseas, effective management of supplier relationships is paramount. Therefore, in collaboration with Yan Zebin of Guangdong University of Finance and Economics, Yang Zhi of Huazhong University of Science and Technology, and Xie En of Tongji University, Professor Yang conducts a study titled Differentiated relational strategies in major supplier networks: A blessing or a curse in collectivist cultures? to examine the impact of favouritism in the supply chain.

Lessons learned from China

The team aims to explore whether the business environment can influence the effects of differentiated relational strategy, and China’s rapidly changing economy provides an ideal environment to study this. Chinese suppliers have seen uncertainties brought by geopolitics and technological turbulence affecting their relationship with buyers.

The researchers conducted a questionnaire survey and follow-up interviews among the management from around 130 manufacturing firms in China. They also obtained the data from the Annual Census Database of Manufacturing Firms of China to measure the company’s actual financial performance.

The research focused on major supplier networks that are highly interdependent, often producing complementary components or outputs for the same buyer. Frequent interactions among these suppliers make each of them aware of its status relative to its peers.

The team’s analysis indicates that companies employing differentiated relational strategies among major suppliers experience poorer financial performance. “A collectivist country emphasises tightly knit relational networks and the equality principle of reward allocation among network members,” Professor Yang says.

Why is equal treatment crucial?

In collectivist societies, group harmony is essential. Playing favourites violates this unspoken rule, and as a result, trust within major supplier networks is likely to be undermined. “Suppliers with relatively weaker relationships with a buyer may lose trust because they feel they are treated unequally,” he adds. “The favoured suppliers may also not fully trust the buyer, worrying that their special status could be at stake at any time.”

Furthermore, the differentiated relational strategy creates invisible divisions, fostering competition rather than collaboration among suppliers. The suppliers become less likely to share sensitive information or work together to solve problems for the buyer.

“Since major suppliers often play complementary roles, this lack of cooperation can lead to production delays, higher costs, and even less innovation, all of which are vital to the buyer,” Professor Yang says.

When favouritism hurts most and least

The researchers delve deeper into the conditions that amplify or moderate the damage caused by favouritism in supplier networks. They find that demand uncertainty and rapid technology change push the impacts of favouritism in opposite directions.

Demand uncertainty refers to fluctuations in how much customers buy. When demand is unpredictable, buyers must frequently revise production plans and place irregular orders. “Demand uncertainty requires buyers to facilitate efficient cooperation within major supplier networks,” Professor Yang says. Under these conditions, favouritism is especially damaging because it limits flexibility in the production lines and makes it harder to mobilise suppliers smoothly.

In contrast, when technology is advancing quickly, favouritism can be less damaging. In fast-moving tech fields, companies often reconfigure their supplier networks and bring in partners with cutting-edge capabilities. Looser ties to existing suppliers can streamline the switch to key partners, helping firms pivot without being held back by prevailing relationships.

Practical takeaways for global supply chains

More and more companies are leveraging algorithms and machine learning to allocate resources. Amid the convenience and speed of the computer brain, Professor Yang underscores the importance of human judgements, particularly since technology may overlook real-world conditions on the ground. “The purchasing managers cannot always rely on technology and may need to step in and incorporate the cultural factor into their decision-making.”

While the differentiated relational strategy may align with individualist cultures, the findings signal that multinational companies should avoid copy-pasting strategies across cultures. What works in individualist markets may backfire in collectivist ones.

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“In collectivist contexts, purchasing managers should avoid a differentiated relational strategy and commit to maintaining equal relational strength with their suppliers,” Professor Yang says. “Transparent and fair practices such as consistent pricing, clear performance metrics and standardised communication may help. This builds trust and reduces administrative workload across the supply chain.”

That said, managers also need to weigh the company’s specific challenges, including demand uncertainty and the need for technological upgrades. If the main challenge is volatile demand, a cohesive supplier network with equal treatment is the greatest asset. If the company is in a race for technological innovation, a more flexible or more differentiated approach might be less harmful.