Bridging organization theory and supply chain management: The case of best value supply chains

Bridging organization theory and supply chain management:

The case of best value supply chains

David J. Ketchen Jr.

*

, G. Tomas M. Hult

a

Department of Management, College of Business, Auburn University, Auburn, AL 36849-5241, United States b

Department of Marketing and Supply Chain Management, Eli Broad Graduate School of Management, Michigan State University, East Lansing, MI 48824-1122, United States

Available online 16 June 2006

Abstract

Rivalry is increasingly being contested at the supply chain level of analysis. Rather than competing ‘‘firm versus firm,’’ today’s organizations are battling ‘‘supply chain versus supply chain.’’ Within this context, best value supply chains are emerging as a means to create competitive advantages and superior performance. While traditional supply chains often focus primarily on one key outcome such as speed or cost, best value supply chains excel along an array of uniquely integrated priorities—cost, quality, speed, and flexibility. We describe how key organizational theories help to distinguish traditional supply chains from best value supply chains. To provide a foundation for future inquiry, we offer theory-based research questions that are focused on best value supply chains.

#_{2006 Elsevier B.V. All rights reserved.}

Keywords: Organization Theory; Supply Chain Management; Best Value Supply Chains; Strategic Supply Chain Management

A supply chain is a series of units that transforms raw materials into finished products and delivers the

products to customers (Mabert and Venkataramanan,

1998). Some of the units in a chain are located inside a single organization’s borders while others cross such borders in complex and evolving ways. Effectively managing supply chains is vital to organizational success. Indeed, there is a growing recognition that modern competition is being fought ‘‘supply chain versus supply chain’’ rather than ‘‘firm versus firm’’ (Boyer et al., 2005; Ketchen and Guinipero, 2004).

The value of supply chain management is reflected in how firms such as Wal-Mart, Toyota, and Dell have used

their supply chains as strategic weapons to gain advantages over peers. Meanwhile, failing to manage supply chains effectively offers serious negative consequences. For example, problems with contract manufacturers led Cisco to write off $2.25 billion of inventory in 2001 (Lee, 2004). In terms of stock price, firms’ market value erodes by an average of 10% following the announcement of a major supply chain problem (Hendricks and Singhal, 2003).

Our contention is thatbest value supply chainsare the chains that are most likely to prosper within today’s competitive global landscape. Our paper has three main goals related to best value supply chains. First, we define best value supply chains and explain the overarching differences between these chains and traditional chains. Second, we describe how key organizational theories help to distinguish best value supply chains from traditional supply chains. Third, we lay a foundation for future inquiry by building on these

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E-mail addresses:ketchdj@business.auburn.edu

(D.J. Ketchen Jr.),hult@msu.edu(G. Tomas M. Hult).

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key theories to offer research questions focused on best value supply chains.

1. Best value and traditional supply chains

Traditionally, supply chain management has been viewed predominantly as a process for moving materials and goods. From this view, supply chain management has been viewed as a support function that helps organiza-tions implement their strategies. As shown inTable 1, best value supply chains take an important additional step. Their focus is onstrategic supply chain manage-ment—the use of a supply chain not merely as a means to get products to where they need to be, but also as a means to enhance key outcomes that drive firm performance (Hult et al., 2004). In other words, strategic supply chain management elevates supply chain management from a

function that supports strategy to a key element of

strategy. An emphasis on strategic supply chain manage-ment does not imply a need to use cutting-edge and expensive equipment, nor to emphasize rich teamwork at all stages in the chain. Instead, the emphasis is on matching the chain’s approach to each problem to the nature of the problem that needs to be solved. Beyond a general focus on strategic supply chain management, best value supply chains are further distinguished from other chains by how they approach issues of agility, adapt-ability, and alignment, and by their ability to pursue multiple priorities (often labeled ‘‘competitive priori-ties’’ in previous supply chain research).

1.1. Agility, adaptability, and alignment

The effectiveness of strategic supply chain manage-ment is closely tied to three attributes: agility, adapt-ability, and alignment (e.g.,Lee, 2004).Agilityrefers to the ability of a supply chain to react quickly to unexpected or rapid shifts in supply and demand (Lee,

2004). One way to create agility is to develop ‘‘cultural competitiveness’’ in the supply chain. Cultural competi-tiveness is defined as the degree to which supply chains are predisposed to detect and fill gaps between what the customer desires and what is currently offered (Hult et al., 2002; cf. Hult et al., 2003). Cultural competitiveness provides supply chain participants with a pattern of shared values and beliefs that assert the importance of certain elements (and omit others), which in turn drive the chain’s approach to serving the end user. In particular, cultural competitiveness can be achieved by emphasizing a spirit of entrepreneurship, innovativeness, and learning among supply chain participants (Hult et al., 2002).

Adaptabilityrefers to a willingness to reshape supply chains when necessary, without ties to legacy issues or

the way the chain has been operated previously (Lee,

2004). Adaptable supply chains rely on information

systems to identify shifts in the market, and then take appropriate actions such as moving facilities, changing suppliers, and outsourcing. Adaptability sometimes requires developing more than one supply chain for the same product in order to ensure distribution. For example, the supply chain surrounding the Gap rely on China for manufacturing and sourcing of Old Navy stores, while Central American facilities supply Gap stores and Italian facilities supply Banana Republic stores. This approach is far more expensive than if all three brands were served by one network, but it helps differentiate the brands and provides insurance against problems that might arise in any of the three regions (Lee, 2004).

Alignmentrefers to ensuring that the interests of all participants in a supply chain are consistent (Lee, 2004). Most chain participants faced with taking an action that benefits their firm versus one that benefits the chain will

choose the former (Narayanan and Raman, 2004). As a

result, incentives must be organized in such a way that all parties’ interests are aligned. For example, contracts

Table 1

A comparison of best value and traditional supply chains

Issue Best value supply chains Traditional supply chains View of supply chain

management

‘‘Strategic supply chain management’’—chains are a strategic weapon

Chains are a method to move products in order to support strategy

Agility Strong ability to be proactive as well as responsive to changes

Modest ability to respond to changes

Adaptability Maintain a limited set of multiple chains to ensure distribution

Often limited to single chains or a large number of chains

Alignment Interests of participants coincide (or is developed to be synergistic)

Participants forced to choose between own and chain’s interests

can be written such that partners share risks, expenses, and benefits equitably. After reducing costs across certain supply chains, Wal-Mart executives split the savings equally between their firm, the supplier (Procter & Gamble), and the customer (Croxton et al., 2001). Alignment of information is also vital—participants must have access to needed data on flows and forecasts in order to fulfill their responsibilities.

1.2. Competitive priorities

Best value supply chains attempt to build on strategic supply chain management in general and agility,

adaptability, and alignment in particular in order to do extremely well along multiple outcomes. Specifi-cally, best value supply chains strive to excel along multiple priorities – often labeled ‘‘competitive priorities’’ – including speed, quality, cost, and flexibility (Hult et al., in press). Thus, they focus on the total value added to the user, not simply one of the priorities such as cost or speed.

Speed(often referred to as ‘cycle time’) reflects the time it takes from initiation to completion of a supply chain process. The focus of speed is the ability to deliver on time, according to a set schedule. Supply chains that

stress quality continually focus on improving their

Table 2

How different theoretical perspectives help to distinguish best value and traditional supply chains

Theoretical perspectiveBest value supply chains Traditional supply chains Key articles in this Issue Transaction cost

economics

Focus on total costs, not just transaction costs, as the basis of ‘‘make or buy’’ decisions

Focus on transaction costs as the basis of ‘‘make or buy’’ decisions

Holcomb and Hitt; Ireland and Webb Short term costs play a secondary role if

the potential for long term, trusting relationships exists

Opportunism undermines trust; short term costs are a primary consideration

McCarter and Northcraft; Morgan, Kaleka and Gooner

Agency theory Use reward structures and cultural competitiveness to align members’ interests

Interests of supply chain members only partially aligned

Morgan, Kaleka and Gooner

Potential for opportunism minimized Strong potential for opportunism Resource dependence

theory

Supply chain members recognize that dependence can create forbearance and trust

Each member tries to avoid becoming dependent on others and tries to make others dependent on it

Crook and Combs; Ireland and Webb

Institutional theory Use industry recipes and best practices to inform, but not dictate, supply chain management activities

Rely heavily on industry recipes and best practices to guide supply chain management activities

Rogers, Purdy, Safayeni and Duimering

Game theory Mutual dependence and trust overcome members’ temptation to pursue self-serving behavior

Some members use free riding, hold up, and leakage to benefit themselves and to the detriment of the chain

McCarter and Northcraft

Network theory A blend of strong and weak ties that matches supply chain needs is created in order to maximize supply chain performance

Strong and weak ties formed on a case-by-case basis rather than strategically

McCarter and Northcraft; Morgan, Kaleka and Gooner

Social capital theory Shared goals, values, and experiences

create shared sensemaking and improved performance

Mix of shared and firm-level goals, values, and experiences circumscribe shared sensemaking and limit performance

Krause, Handfield and Tyler; Ireland and Webb

Strategic choice Strategic decisions made with concern for the chain as the primary driver. This ‘‘strategic supply chain management’’ opens the door to unique blended strategies that transcend the firm

Strategic decisions made with concern for the firm as the primary driver. This approach constrains firms to using a generic strategy such as prospector or low cost leader

Miles and Snow

Resource-based view/knowledge-based view

Assume that unique resources exist at the supply chain level, and that supply chains can be inimitable competitive weapons

Assume that unique resources reside within firms. Supply chain management is thus a tool to complement these resources

Holcomb and Hitt; Miles and Snow

supply chain processes to increase product reliability

and customer satisfaction. Cost-driven supply chains

strive to create customer value by either reducing costs or increasing benefits in the supply chain equation (i.e., value = benefits/costs). Flexibility refers to a supply chain’s responsiveness to the consistent and changing needs of its users. Flexibility includes both the degree of flexibility in the supply chain process itself and the

product or service provided (Boyer and Lewis, 2002;

Ward et al., 1998; Youndt et al., 1996). Each of these metrics is expected to influence crucial outcomes. For example, not only does cycle time directly assess supply chain functioning, cycle time has a direct

linkage to profit at the firm level (Handfield and

Nichols, 2002).

2. Organization theories and best value supply chains

As a relatively new concept, the notion of best value supply chains can become clearer and richer if examined from a variety of important theoretical perspectives. As shown inTable 2, in this section we consider the implications for the best value supply chain concept offered by nine prominent theoretical perspectives that are used as a conceptual underpinning in at least one of the articles in the special issue: transaction cost economics, agency theory, resource dependence theory, institutional theory, game theory,

network theory, social capital theory, strategic

choice, and the resource-based view/knowledge based view. Prior to elaborating on the nine theories, it is important to state that a number of other theories can also help explain supply chain phenomena (e.g., behavioral theory of the firm, punctuated equilibrium, industrial organization, contingency theory, evolution-ary economics, population ecology). These theories, along with the ones covered in the issue, should be given careful attention in future research on supply chains.

Transaction cost economics(TCE) offers a natural fit with supply chain management research because it centers on the ‘‘make or buy’’ decision—whether a firm should make a product within the confines of its organizational boundaries or purchase it from an outside provider (Williamson, 1975). The overarching goal is to maximize performance by minimizing transaction costs within and between organizations. Given the natural fit and previous use of the TCE in supply chain research, TCE was a popular theory in this special issue as well. The articles by Holcomb and Hitt, Ireland and Webb, McCarter and Northcraft, and Morgan, Kaleka and

Gooner all discuss TCE’s implications for various aspects of supply chain management.

According to TCE, managers should minimize transaction costs through selecting their approach to the make or buy decision. Transaction costs are the expenses generated by identifying fair market prices, negotiating, and carrying out economic exchange (Williamson, 1991). Under some conditions, internaliz-ing an activity minimizes such costs, while under others, buying a product or service from another firm is best. Supply chain managers must balance these contingencies to find a suitable balance of relationships across a chain.

Within traditional supply chains, short-term transac-tion costs are the overriding concern. This creates the potential for opportunism, wherein one firm takes advantage of another firm. For example, a supplier might reduce the quality of its products in order to increase its own margins. Given this context, trust between supply chain members is often difficult to establish and maintain. In contrast, the members of best value supply chains focus on total costs, not just short-term transaction costs, as the basis of make or buy decisions. There is recognition that acting opportunis-tically has long-term implications—a supplier that is viewed as overly self-serving may find itself excluded from supply chains unless it offers a product or service that is very unique. This exclusion represents economic costs that wise firms are unwilling to risk. As a result, short-term costs are relegated to a secondary role, and members devote their efforts to building long term, trusting relationships that benefit all participants. Overall, applying TCE ideas to best value supply chains suggests the following questions for future research: To what extent do best value supply chains manage total costs as opposed to transaction costs? What are the performance implications of this emphasis on total costs? What formal and informal mechanisms are used to prevent and punish opportunism within best value supply chains?

Agency theory, which was discussed in this issue by Morgan et al., also offers a natural fit with supply chain management research. This theory centers on occasions wherein one entity (the principal) delegates authority to a second (the agent) to act on its behalf (Eisenhardt,

1989). Problems arise in these relationships because

agents often behave in ways that benefit them, not principals. For example, stockholders delegate author-ity to top managers to run corporations. A chief executive officer may exploit his/her role as an agent by acquiring another firm in order to boost his/her own compensation, regardless of the potential for the

acquisition to add value to the company and enrich the stockholders. Accordingly, principals must closely monitor agents’ decisions, create reward structures that reinforce desired activities, or both.

Supply chains are replete with relations involving one firm delegating authority to another. As a result, conflicts of interest often arise within traditional supply chains. Participants must choose between a course of action that benefits their firm versus one that benefits the chain as a whole. Most managers in this situation will select the former option because their primary loyalty lies with their home firm. Best value supply chains recognize and account for this tension. As discussed above, best value supply chains leverage tools such as reward structures and cultural competitiveness to ensure alignment among participants’ interests. This removes the temptation to take advantage of other supply chain members. Members of best value supply chains also recognize that the sequential nature of supply chains dictates that they are agents in some links and principals in others. Thus, opportunism in one’s role as an agent can be punished by other firms in the chain. Overall, applying agency theory to best value supply chains suggests the following questions for future research: What structures are most effective at ensuring that all best value supply chain members benefit from chain success? Do the insights generated in a firm’s role as an agent help it be more effective as a principal? If so, how?

Resource dependence theory(RDT) centers on how

some firms become reliant on others for needed inputs such as goods and materials, and how firms can

manage such relationships (Pfeffer and Salancik,

1978). The asymmetric interdependence that exists in

these inter-firm relationships is critical to reduce environmental uncertainty for some firms. As supply chain members work together closely, they often become more dependent on each other. Thus, RDT has a high level of value in the supply chain context. The articles by Ireland and Webb and Crook and Combs discuss RDT’s implications for key aspects of supply chain management.

Within traditional supply chains, each member tries to avoid becoming overly dependent on others for fear of being exploited. At the same time, making others dependent on one’s own firm can create a position of strength. In contrast, best value supply chains recognize that taking advantage of resource dependencies can have unintended and grave consequences. For example, in recent years many aerospace manufacturers man-euvered to make their part suppliers highly dependent on them, and then used this leverage to squeeze the suppliers’ margins. This abuse eventually led the part

suppliers to begin bypassing the manufacturers and selling spare parts directly to end-users. The result was a dramatic drop in the manufacturers’ fortunes (Rosetti and Choi, 2005). Thus, from the perspective of best value supply chains, dependencies should be used to create mutual forbearance and trust, not to drive aggressive exploitation of one chain member by another. At a broader level, considering RDT in the best value supply chain setting suggests the following questions: When should a firm within a best value supply chain embrace resource dependency or be wary of it? How do best value supply chains ensure that dependent firms are not abused by firms on which they depend? Should resource-sharing structures be enacted to mitigate resource dependencies?

Institutional theoryis the centerpiece of the article by Rogers, Purdy, Safayeni and Duimering. This theory emphasizes the role of environmental pressures, many of them subtle and evolving, on firm activities (DiMaggio and Powell, 1983). A foundational element of institutional theory is that organizations become homogeneous as a function of isomorphism over time. Traditional supply chains tend to rely heavily on industry recipes and best practices to guide supply chain management activities. Copying what works for supply chain icons such as Wal-Mart and Federal Express is often seen as a prudent approach. In contrast, best value supply chains use industry recipes and best practices to inform, but not dictate, supply chain management activities. Such chains recognize the potential folly of mimicry. For example, attempting – and failing – to duplicate Wal-Mart’s strategic supply chain manage-ment activities was one of the key blunders that led Kmart into bankruptcy. Looking to the future, applying institutional theory to best value supply chains suggests the following questions: To what extent does a ‘‘formula’’ for creating best value supply chains exist in any given industry? Can such formulas be applied across different industries and countries? How do institutional forces shape the competitive actions of best value supply chains?

Game theory uses mathematics and hypothetical

scenarios to draw conclusions about the likelihood of

decisions and actions (Axelrod, 1984). Game theory

plays a key role in the article by McCarter and Northcraft. Although this theory has been criticized as overly mechanistic, it can produce remarkable insights and conclusions. For example, game theory suggested that the United States and the Soviet Union would not escalate from the Cold War to actual large-scale combat because the complete destruction of each side would almost certainly follow. This prediction held true for

decades until the dissolution of the Soviet Union in the 1990s.

Trying to predict others’ actions is a key element of game theory. Within the supply chain setting, members of traditional chains have reason to be suspicious of each other’s motives. As discussed by McCarter and Northcraft, some members use tactics such as free riding, hold up, and leakage to benefit themselves and to the detriment of the chain. The results include protective behavior and suboptimal chain performance along key issues such as speed, quality, cost, and flexibility. In contrast, mutual dependence and trust overcome members’ temptation to pursue self-serving behavior within best value supply chains. The result is not jointly beneficial suspicion as in U.S.–Soviet relations, but rather a positive sense of collaboration that builds agility and adaptability at the supply chain level. Looking to the future, applying game theory to best value supply chains suggests the following questions: How do best value supply chains avoid free riding, hold up, and leakage? When should ‘‘forgive-ness’’ be extended within a best value supply chain to a member that has acted self-servingly?

Network theory describes, explains, and predicts

relations among linked entities (Thorelli, 1986).

Supply chains are, in essence, a form of network, thus, network theory has the potential to reveal interesting truths about chains. The articles by McCarter and Northcraft and Morgan et al. feature network theory. Strong and weak ties are key concepts within network theory. As the names suggest, strong ties involve firms that are tightly coupled and loose ties involve firms with more tenuous links (cf.Granovetter, 1973). Each type presents certain advantages to supply chains. Strong ties provide greater reliability, for example, while loose ties enhance flexibility. Within traditional supply chains, strong and weak ties are formed on a case-by-case basis without much concern for the overall network configuration. In contrast, best value supply chains approach these issues strategically. A blend of strong and weak ties that matches supply chain needs (such as reliability and flexibility) is created in order to maximize supply chain perfor-mance. Useful questions for future research from the vantage point of network theory include: How specifically do best value supply chains match strong and weak ties to various contingencies relative to traditional supply chains? What are the implications of these differences for agility, adaptability, alignment, and the competitive priorities?

Social capital theorycenters on the ‘‘softer side’’ of organizational activity. Social capital theory recognizes

that the firms composing supply chains are themselves composed of people, and that the interpersonal skills and relationships among these people (such as the ‘‘credits’’ and trust they build with each other) shape supply chain activities and outcomes (cf.Nahapiet and Ghoshal, 1998). This theory plays a prominent role in the articles by Ireland and Webb, and Krause, Handfield, and Tyler. Within a traditional supply chain, each person has conflicted loyalties between the firm and chain. The resultant mix of shared and firm-level goals, values, and experiences circumscribes shared sensemaking and limits performance. In contrast, the alignment among best value supply chain members creates a context wherein shared goals, values, and experiences create shared sensemaking and improved performance. Key questions for the future include: What roles do interpersonal relationships play in the creation and maintenance of best value supply chains? To what extent are best value supply chains better at shared cognitive processes than traditional supply chains?

Strategic choice theory stands in contrast to

externally focused approaches such as institutional theory. Strategic choice contends that managers’ decisions play a tremendous role in organizational success or failure (Child, 1972). A central issue in strategic choice theory is strategic renewal and repositioning. A foundational assumption is that firms can enact and actively shape their environment. Strategic choice figures prominently in Miles and Snow’s article. Within traditional supply chains, strategic decisions are made with concern for the firm as the primary driver. This approach constrains firms to using a generic strategy such as prospector (Miles and Snow, 1978) or low cost leader (Porter,

1980). Within best value supply chains, however,

strategic decisions are made with concern for the

chain as the primary driver. This strategic supply

chain managementopens the door to unique blended

strategies that transcend the firm and provide the chain with increased agility and adaptability. Some logical research questions grounded in strategic choice include: To what extent are best value supply chains better at shaping their fates than traditional supply chains?, and Are best value supply chains significantly more likely than traditional supply chains to be able to enact their environment?

Finally, the resource-based view examines how

certain assets and capabilities lay a foundation for

competitive advantage and superior performance

(Barney, 1991). The basic approach of the resource-based view is viewing the firm as a bundle of resources,

and asserting that resource heterogeneity exist among firms. The closely relatedknowledge-based viewtargets the role of wisdom as an asset and capability (Grant, 1996). The articles by Holcomb and Hitt, and Miles and Snow feature these views. The traditional approach to supply chains contends that unique resources reside within firms. Supply chain management is thus a tool to complement these resources. In contrast, best value supply chains reflect the assumption that unique resources exist at the supply chain level, and that supply chains can be inimitable competitive weapons. Relevant issues for future research include: What kinds of unique resources are found at the supply chain level of analysis? How can these supply chain resources be protected from acquisition and imitation? To what extent do these resources enable supply chains to excel along the competitive priorities?, and Are supply chain level resources more or less inimitable than firm level resources?

3. Conclusion

Best value supply chains use strategic supply chain management in an effort to excel in terms of speed, quality, cost, and flexibility. Despite the value of this concept to modern firms, little is known about how prominent theories can help shed light on what distinguishes these chains from others and makes them exceptionally successful. This paper focused on building bridges between organization theory and supply chain management in order to help close the gap between what we know about best value supply chains and what we need to know. In particular, applying insights from transaction cost economics, agency theory, resource dependence theory, institu-tional theory, game theory, network theory, social capital theory, strategic choice, and the resource-based view/knowledge based view offers a rich depiction of best value supply chains and provides important questions that should be tackled within future research.

Acknowledgement

We appreciate the comments of R. Duane Ireland on an earlier version of this article.

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