A Structural Analysis of Contractual Innovations within the CIS Milk Industry

Utilising primary survey data, this paper evaluates the relationships between a set of supplier development strategies and performance within the milk industry in Armenia and Ukraine. Improving supplier performance is a critical task for the dairy industry in the Former Soviet Union as, during the 1990s both the quantity and quality of agricultural output deteriorated sharply. Fragmented supply chains led to high transaction costs and, in some cases, market failure. Drawing on the work of Krause et al. (2000) and Doney and Cannon (1997), a theoretical framework is presented that proposes that, either directly or indirectly, supplier assessment strategies, supplier incentives, competitive pressure, direct involvement, and trust between buyers and sellers, lead to improvements in supplier performance. Data from 618 milk producers were analysed by structural equation modelling to test ten research hypotheses. All relationships are significant except those related to supplier assessment. In particular, the results indicate that both trust and competitive pressure have a direct and positive impact on performance improvement. Trust can be fostered by buyers providing feedback and performance data to suppliers. In contrast, direct involvement strategies are negatively related to performance improvement and weaken farmers’ trust. Implications for managers are discussed along with suggestions for further research.