Don't Trust Trust: A Dynamic Approach to Controlling Supplier Involvement in New Product Development

Prior literature stresses the importance for manufacturers to use formal and informal controls to coordinate collaborative new product development activities with suppliers. In doing so, the existence of trust between manufacturers and suppliers is believed to play a key role because it enables manufacturers to reduce investments in formal controls and rely more on less costly informal controls. Manufacturers and suppliers don't suddenly trust each other though: trust typically grows over time as the partners get to know each other. Trust may also decrease if manufacturers overuse formal controls or if suppliers underperform. These fluctuations in trust over the course of supplier-manufacturer relationships complicate the so-called trust-control nexus and raise important questions about the impact of trust on the efficiency and effectiveness of formal and informal controls as coordination mechanisms. Therefore, this study examines how manufacturers should balance formal and informal controls over time to reap the full benefits of collaborative product development with suppliers. For that purpose, a conceptual and system dynamics model are developed, which incorporate the links among formal and informal controls, trust, and the supplier's development performance. In an empirical validation in the context of the shipbuilding industry, the results reject the notion that manufacturers must lessen formal controls and increase informal controls with trust. Instead, it is most efficient and effective to invest always in formal controls, particularly process control, to coordinate supplier involvement in new product development. These results have important theoretical and managerial implications: Informal controls are not as profitable as expected.